Monday, July 25th, 2016

ETF Stats for June 2016: More Teeter-Totter Failures

By Ron Rowland
17:00 pm CDT

Thirty-two new ETFs and ETNs came to market in June, and three closed up shop.  The net increase of 29 puts the listed count at 1,931 (1,729 ETFs and 202 ETNs) at the end of June.  Assets climbed by $30.6 billion, with $19.3 billion coming from inflows and $11.2 billion the result of market action.  Overall assets of U.S.-listed ETFs and ETNs now stand at $2.25 trillion.

The most dubious new offering of the month was the rollout of another teeter-totter fund pair from a firm with a misleading name.  The AccuShares product line is anything but accurate, and it illustrates that the sponsors of teeter-totter products themselves do not understand how these function in real-world trading.  This lack of understanding apparently carries over to regulators who approve them and the financial media who laud them.

The latest disasters in this space are called the AccuShares S&P GSCI Crude Oil Excess Return Up Shares (OILU) and AccuShares S&P GSCI Crude Oil Excess Return Down Shares (OILD).  Launched in June, these products do not own anything—they are offsetting paired shares that simply hold cash.  In theory, when crude oil moves up, the net asset value (“NAV”) of OILU goes up, and the NAV of OILD goes down.  However, investors cannot buy and sell at the NAV, and the market price is unlinked from the NAV more than 95% of the time.

These products defy nearly every attribute that ETF investors hold dear, namely:

  • Demand-driven share creation: New teeter-totter shares can only be created in offsetting pairs, which destroys any notion of being demand-driven.  If rising crude-oil prices increases the demand for OILU, then new shares of OILU can only be created if an equal number of undesirable OILD shares are also created.
  • Ability to arbitrate the price to NAV: The offsetting pair creation-and-redemption mechanism hinders (perhaps prevents is a better word) the ability of market makers to arbitrate the market price to the underlying NAV.  Huge discounts and premiums are the norm.
  • Pass-through vehicles: Unlike the thousands of mutual funds and ETFs that have been introduced the past 80-plus years, OILU and OILD are not pass-through vehicles.  Instead, they are taxed as C-corporations, meaning 35% of taxable gains are an added expense to the fund before shareholders pay taxes on their profits.
  • Commodity exposure without distributions: Crude oil does not pay dividends, and investors desiring exposure to crude-oil prices do not expect monthly distributions.  However, these products make monthly distributions.  Although they are return-of-capital instead of a dividend, the day these once-a-month distributions are made is the one day a month that the share price can potentially be close to the NAV.  There is no such hope on the other 20 trading days (95%) of a typical month.
  • Distributions independent from exposure: Soon after AccuShares launched its VIX pairs, it realized these return-of-capital distributions not only reduced each investor’s basis, but they also drained assets from the funds.  To prevent the asset depletion, AccuShares started making distributions of offsetting shares.  Owners of Up shares now receive distributions of Down shares and vice versa.
  • Performance tracking: Not only do the prices not track the NAV, but the performance of a given product is impossible to determine given the frequency, amounts, and types of distributions.  AccuShares does not provide any performance data on its funds.

Paired-share teeter-totter funds have all been failures, and in my opinion, they are a blight on the ETF industry.  These failures include the following:

Another interesting industry event took place recently when AdvisorShares fired TrimTabs as the manager (subadvisor) of the AdvisorShares TrimTabs Float Shrink ETF (TTFS).  Independent advisors work with AdvisorShares to jointly launch new products.  Advisors associated with these ETFs have invested a great deal of time, effort, and cash.  Additionally, it appears they absorb much of the costs involved with capping the expense ratio whenever the ETFs are not generating enough revenue to cover ongoing expenses.

When these ETFs fail to attract enough revenue to cover costs, one of three things typically happens: (1) the subadvisor decides to grin and bear it while continuing to absorb the expense, (2) a decision is made to close and liquidate the fund, or (3) AdvisorShares and the subadvisor mutually agree to bring in a different subadvisor.  To my knowledge, this is the first time that AdvisorShares has unilaterally fired a subadvisor.  It’s even more surprising because the AdvisorShares TrimTabs Float Shrink ETF (TTFS) was one of the most successful ETFs ever launched by AdvisorShares.  At the time of the announcement, its $178 million in assets was the fourth largest of the 29 ETFs that AdvisorShares has brought to market.  Of the others, eight have already been closed and 10 are on ETF Deathwatch.

According to the AdvisorShares press release, TrimTabs was replaced by Wilshire Associates as the manager, and the name of the fund was changed to the AdvisorShares Wilshire Buyback ETF (TTFS) effective July 1.  According to the TrimTabs Asset Management press release, this move is not only surprising but baffling given the strong performance and financial success.  Investors should be keeping their eye out for a new ETF from TrimTabs later this year to replace TTFS.  Meanwhile, any investment advisor considering working with AdvisorShares on bringing an ETF to market should take this as a warning.

June 2016 Month EndETFsETNsTotal
Currently Listed U.S.1,7292021,931
Listed as of 12/31/20151,6442011,845
New Introductions for Month31132
Delistings/Closures for Month123
Net Change for Month+30-1+29
New Introductions 6 Months1168124
New Introductions YTD1168124
Delistings/Closures YTD31738
Net Change YTD+85+1+86
Assets Under Management$2,229 B$23.8 B$2,252 B
% Change in Assets for Month+1.4%+2.1%+1.4%
% Change in Assets YTD+6.3%+11.1%+6.3%
Qty AUM > $10 Billion55055
Qty AUM > $1 Billion2615266
Qty AUM > $100 Million80336839
% with AUM > $100 Million46.4%17.8%43.5%
AUM Flows for Month $19.30 B$0.20 B$19.32 B
AUM Flows YTD $73.21 B$1.51 B$74.72 B
Monthly $ Volume $1,798 B$85.1 B$1,883 B
% Change in Monthly $ Volume+29.9%+35.3%+30.2%
Avg Daily $ Volume > $1 Billion11213
Avg Daily $ Volume > $100 Million1006106
Avg Daily $ Volume > $10 Million31411325
Actively Managed ETF Count (w/ change)149+4 mth+12 ytd
Actively Managed AUM $26.4 B+3.8% mth+15.0% ytd
Data sources:  Daily prices and volume of individual ETPs from Norgate Premium Data.  Fund counts and all other information compiled by Invest With An Edge.

New products launched in June (sorted by launch date):

  1. SPDR Dorsey Wright Fixed Income Allocation ETF (DWFI), launched 6/2/16, is a fund-of-funds ETF that uses price momentum to select ETFs targeting fixed-income securities.  The selection universe is limited to other SPDR ETFs and includes those providing exposure to U.S. and foreign developed and emerging-market bonds; Treasury bonds; corporate bonds; high-yield bonds; inflation-protected bonds; floating-rate notes; first-lien, senior-secured, floating-rate bank loans; preferred securities; U.S. municipal bonds; and U.S. convertible securities.  DWFI has an expense ratio of 0.60% (DWFI overview).
  2. Franklin LibertyQ Emerging Markets ETF (FLQE), launched 6/3/16, seeks to track an index of stocks from emerging-market countries with favorable exposure to quality, value, momentum, and volatility factors.  Its expense ratio is capped at 0.55% (FLQE overview).
  3. Franklin LibertyQ Global Dividend ETF (FLQD), launched 6/3/16, seeks to track an index of stocks from developed- and emerging-market countries with high and persistent dividend income along with favorable exposure to the quality investment-style factor.  FLQD will cap its expense ratio at 0.45% (FLQD overview).
  4. Franklin LibertyQ Global Equity ETF (FLQG), launched 6/3/16, seeks to track an index of stocks from developed and emerging markets that have favorable exposure to quality, value, momentum, and volatility factors.  The ETF caps its expense ratio at 0.35% (FLQG overview).
  5. Franklin LibertyQ International Equity Hedged ETF (FLQH), launched 6/3/16, seeks to track an index of stocks from developed markets, excluding the U.S. and Canada, with favorable exposure to quality, value, momentum, and volatility factors.  The ETF hedges foreign currency exposure and caps its expense ratio at 0.40% (FLQH overview).
  6. The Health and Fitness ETF (FITS), launched 6/7/16, is a thematic ETF offering from Janus.  The underlying index from Solactive seeks exposure to companies globally that are poised to take advantage of the growing trend toward health and fitness consumption, including companies whose business is focused on fitness technology and equipment, sports apparel, nutrition, and sports/fitness facilities.  The ETF uses a multi-tier, equal-weighting methodology, and its expense ratio is 0.50% (FITS overview).
  7. The Long-Term Care ETF (OLD), launched 6/7/16, is a thematic ETF offering from Janus.  The underlying index from Solactive seeks exposure to companies globally that are positioned to profit from providing long-term care to the aging population.  This includes companies owning or operating senior living facilities, nursing services, specialty hospitals, senior housing, biotech companies for age-related illnesses, and companies that sell products and services to such facilities.  OLD uses a multi-tier, equal-weighting methodology and has an expense ratio of 0.50% (OLD overview).
  8. The Obesity ETF (SLIM), launched 6/7/16, is a thematic ETF offering from Janus.  The underlying index from Solactive seeks exposure to companies globally that could benefit as they fight the global obesity epidemic.  These include biotechnology, pharmaceutical, health care, and medical device companies whose business is focused on obesity; obesity-related disease, including diabetes, high blood pressure, high cholesterol, heart disease, stroke, sleep apnea; weight loss programs; supplements; and plus-sized apparel.  The ETF uses a multi-tier, equal-weighting methodology with an expense ratio of 0.50% (SLIM overview).
  9. The Organics ETF (ORG), launched 6/7/16, is a thematic ETF offering from Janus.  The underlying index from Solactive seeks exposure to companies globally that can capitalize on the increasing desire for naturally derived food and personal-care items, including companies which service, produce, distribute, market, or sell organic food, beverage, cosmetics, supplements, or packaging.  ORG uses a multi-tier, equal-weighting methodology, and its expense ratio is 0.50% (ORG overview).
  10. RiverFront Dynamic US Dividend Advantage ETF (RFDA), launched 6/7/16, is an actively managed ETF seeking to provide capital appreciation and dividend income.  RiverFront Investment Group, LLC, assembles a portfolio of eligible securities based on several core attributes such as value, quality, and momentum.  It also considers multiple proprietary factors within each core attribute.  The ETF has an expense ratio of 0.52% (RFDA overview).
  11. RiverFront Dynamic US Flex-Cap ETF (RFFC), launched 6/7/16, is an actively managed ETF seeking to provide capital appreciation.  RiverFront assembles a portfolio of eligible securities based on several core attributes such as value, quality, and momentum.  The manager also considers multiple proprietary factors within each core attribute, and the ETF has an expense ratio of 0.52% (RFFC overview).
  12. Direxion Daily S&P 500 Bear 1x Shares (SPDN), launched 6/8/16, seeks daily investment results, before fees and expenses, that are 100% of the inverse (opposite) of the performance of the S&P 500 Index.  The portfolio is implemented with swaps, and the expense ratio is capped at 0.45% (SPDN overview).
  13. Aptus Behavioral Momentum ETF (BEMO), launched 6/9/16, seeks to track an index of 25 equal-weighted, large, U.S.-traded equity securities.  The proprietary index methodology, developed by Aptus Capital Advisors, quantitatively ranks large U.S. companies based on a combination of momentum and irrational investor behavior and seeks to gain exposure to only the highest ranked stocks.  The ETF has an added objective of capital protection during market downtrends and is therefore risk managed in that it can vary between 100% long-only exposure to stocks or 100% exposure to intermediate Treasury bonds dependent on the overall market environment.  BEMO has an expense ratio of 0.79% (BEMO overview).
  14. Columbia Sustainable Global Equity Income ETF (ESGW), launched 6/13/16, seeks to provide exposure to U.S. and foreign developed market large- and mid-cap companies believed to offer sustainable levels of income as well as total return opportunity.  The underlying index applies a systematic, rules-based multi-factor model and screens companies based on environmental, social, and governance practices.  Its expense ratio is 0.40% (ESGW overview).
  15. Columbia Sustainable International Equity Income ETF (ESGN), launched 6/13/16, seeks to provide exposure to foreign developed market large- and mid-cap companies believed to offer competitive and sustainable levels of income, as well as competitive total return.  The underlying index applies a systematic, rules-based, multi-factor model and screens companies based on environmental, social, and governance practices.  ESGN has an expense ratio of 0.45% (ESGN overview).
  16. Columbia Sustainable U.S. Equity Income ETF (ESGS), launched 6/13/16, seeks to provide exposure to U.S. large- and mid-cap companies believed to offer sustainable levels of income, as well as total return opportunity.  The underlying index applies a systematic, rules-based, multi-factor model and screens companies based on environmental, social, and governance practices.  The new ETF has an expense ratio of 0.35% (ESGS overview).
  17. RiverFront Dynamic Core Income ETF (RFCI), launched 6/14/16, is an actively managed ETF seeking total return with an emphasis on income as the source of that total return.  The global bond portfolio is constructed using a two-step process, with the first step setting the allocation among different fixed-income asset classes and the second step determining security selection within those asset classes.  RFCI has an expense ratio of 0.51% (RFCI overview).
  18. RiverFront Dynamic Unconstrained Income ETF (RFUN), launched 6/14/16, is an actively managed ETF seeking total return with an emphasis on income as the source of that total return.  The global bond portfolio is constructed using a two-step process, with the first step setting the allocation among different fixed-income asset classes and the second step determining security selection within those asset classes.  A quantitative methodology determines the allocations’ various maturities of investment-grade securities, high-yield securities, and emerging-market debt.  RFUN has an expense ratio of 0.51% (RFUN overview).
  19. First Trust RiverFront Dynamic Emerging Markets ETF (RFEM), launched 6/15/16, is an actively managed ETF seeking to provide capital appreciation of emerging-market equities along with a dynamic currency-hedging strategy that can hedge anywhere from 0%–100% of the fund’s currency exposure.  A quantitative matrix screen scores geographies on fundamental and technical momentum and combines this with a qualitative assessment seeking to identify meaningful changes in fundamentals.  The portfolio managers combine the outputs of their quantitative and qualitative processes with their view on valuation, relative to these outputs.  The expense ratio comes in at 0.95% (RFEM overview).
  20. iShares MSCI China A ETF (CNYA), launched 6/15/16, seeks to track the investment results of an index composed of domestic Chinese equities known as A-shares that trade on the Shanghai or Shenzhen Stock Exchange.  Holdings are capitalization-weighted, and the fund has an expense ratio of 0.65% (CNYA overview).
  21. Direxion Daily High Yield Bear 2x Shares (HYDD), launched 6/16/16, seeks daily investment results that are 200% of the inverse (opposite) of the performance of the Barclays U.S. High Yield Very Liquid Index.  The portfolio is implemented with swaps on the SPDR Barclays High Yield Bond ETF (JNK) and comes with an expense ratio of 0.80% (HYDD overview).
  22. iShares Fallen Angels USD Bond ETF (FALN), launched 6/16/16, seeks to track the Barclays US High Yield Fallen Angel 3% Capped Index, which is designed to reflect the performance of U.S. dollar denominated, high-yield corporate bonds that were previously rated investment grade.  Bonds are market-value-weighted with a 3% cap on each issuer, and the ETF carries an expense ratio of 0.35% (FALN overview).
  23. iShares iBoxx $ High Yield ex Oil & Gas Corporate Bond ETF (HYXE), launched 6/16/16, seeks to track the investment results of an index composed of a broad range of U.S. dollar–denominated, high-yield corporate bonds that excludes those issued by companies in the oil and gas sector.  HYXE has an expense ratio of 0.50% (HYXE overview).
  24. AccuShares S&P GSCI Crude Oil Excess Return Down Shares (OILD), is a product that is taxed as a C-corporation and seeks to track the inverse performance of the S&P GSCI Crude Oil Index just once per month.  The product does not own anything and is combined with the Up Shares (OILU) in what is known as a teeter-totter arrangement.  AccuShares attached numerous warnings to OILD, including that the fund will only seek to match the inverse performance of the Index once per month (between distribution dates), that it will be subject to large price premiums and discounts the remainder of the month, and that it should be considered a short-term investment.  Additionally, the fund may make large return-of-capital distributions on a monthly basis, the fund will often make distributions of offsetting paired shares, and new shares will only be issued in offsetting pairs.  To maintain your original correlation to the underlying Index when receiving a distribution of offsetting shares, you will have to sell the shares of the opposite class, and this will impede the ability of your investment to track the performance of the underlying Index.  The fund is expected to be treated as a C-corporation for income-tax purposes, and the various federal, state, and local taxes will be accrued daily, reducing the fund’s value.  This product claims to have an expense ratio of 0.29%, but that does not include its tax liabilities (OILD overview).
  25. AccuShares S&P GSCI Crude Oil Excess Return Up Shares (OILU), launched 6/28/16, is a product that is taxed as a C-corporation and seeks to track the S&P GSCI Crude Oil Index just one day per month.  The product does not own anything and is combined with the Down Shares (OILD) in what is known as a teeter-totter arrangement.  The product comes with numerous warnings, which are outlined above in the OILD description.  OILU claims to have an expense ratio of 0.29%, but that does not include its tax liabilities (OILU overview).
  26. Deutsche X-trackers Russell 2000 Comprehensive Factor ETF (DESC), launched 6/28/16, is an index-based fund designed to capture exposure to small-cap U.S. equities based on quality, value, momentum, low volatility, and size.  These factors represent common stock characteristics, for which there is a broad academic consensus, that explain a stock’s risk and performance.  DESC has an expense ratio of 0.30% (DESC overview).
  27. RBC S&P 500 Trend Allocator PR Index ETN (TALL), launched 6/28/16, are exchange-traded notes (“ETNs”) issued by the Royal Bank of Canada that are linked to the return of the S&P 500 Trend Allocator PR Index.  The underlying Index will track the S&P 500 Total Return Index if it has been above its 200-day moving average for five consecutive days.  If the S&P 500 Total Return Index is below its 200-day moving average for five consecutive days, then the underlying Index will track the cash rate.  The TALL ETN has an investor fee (expense ratio) of 0.85% (TALL overview).
  28. SPDR S&P Internet ETF (XWEB), launched 6/28/16, intends to track the internet segment of the S&P Total Market Index, which comprises the internet retail subindustry and internet software & services subindustry.  XWEB uses an equal-weighting scheme and carries an expense ratio of 0.35% (XWEB overview).
  29. SPDR S&P Technology Hardware ETF (XTH), launched 6/28/16, seeks to track the performance of the technology hardware segment of the S&P Total Market Index, which comprises the technology hardware, storage & peripherals subindustry; electronic equipment & instruments subindustry; and electronic components subindustry.  XTH employs an equal-weighting methodology and comes with an expense ratio of 0.35% (XTH overview).
  30. Guggenheim S&P 100 Equal Weight ETF (OEW), launched 6/30/16, owns the 100 mega-cap stocks of the S&P 100 Index using an equal-weighting approach.  The new ETF has an expense ratio of 0.40% (OEW overview).
  31. iShares MSCI EAFE ESG Select ETF (ESGD), launched 6/30/16, seeks to track the investment results of an index composed of large- and mid-capitalization developed-market equities, excluding the U.S. and Canada, that have positive environmental, social, and governance characteristics at an expense ratio of 0.40% (ESGD overview).
  32. iShares MSCI EM ESG Select ETF (ESGE), launched 6/30/16, seeks to track the investment results of an index composed of large- and mid-capitalization emerging-market equities that have positive environmental, social, and governance characteristics.  ESGE has an expense ratio of 0.45% (ESGE overview).

Product closures in June and last day of listing:

  1. CS X-Links Merger Arbitrage ETN (CSMA) 6/10/16
  2. Barclays OFI SteelPath MLP ETN (OSMS) 6/21/16
  3. ALPS Enhanced Put Write Strategy (PUTX) 6/24/16

Product changes in June:

  1. Franklin Short Duration U.S. Government ETF (FTSD) was renamed the Franklin Liberty Short Duration U.S. Government ETF (FTSD) effective June 1.
  2. KraneShares CSI New China ETF (KFYP) was renamed KraneShares Zacks New China ETF (KFYP) effective June 1.
  3. AccuShares Spot CBOE VIX Up Shares (VXUP) and AccuShares Spot CBOE VIX Down Shares (VXDN) effected 1-for-3 reverse splits on June 23.
  4. ProShares Short S&P 500 (SH) underwent a 1-for-2 reverse split effective June 24.
  5. VanEck Vectors High Income MLP ETF (YMLP) underwent a 1-for-5 reverse split effective June 29.

Announced product changes for coming months:

  1. AdvisorShares TrimTabs Float Shrink ETF (TTFS) will change its subadvisor and be renamed the AdvisorShares Wilshire Buyback ETF (TTFS) effective July 1 (TrimTabs’ response).
  2. Effective on or after July 1, 2016, iShares will change from Barclays to ICE U.S. Treasury Bond Index Series indexes for iShares Core U.S. Treasury Bond ETF (GOVT), iShares Short Treasury Bond ETF (SHV), and iShares 10-20 Year Treasury Bond ETF (TLH).
  3. Falah Russell-IdealRatings U.S. Large Cape ETF (FIA) will close and liquidate with July 14 being its last day of listed trading.
  4. Direxion Daily Total Market Bear 1x Shares (TOTS) will close and liquidate with July 15 being its last day of trading.
  5. The SPDR Quality Mix suite of 13 ETFs will be rebranded as the SPDR StrategicFactors suite effective July 15.
  6. AccuShares Spot CBOE VIX Down Shares (VXDN) will receive a regular distribution payable in shares of VXUP and VXDN, and a corrective distribution of payable in shares of VXUP effective July 20.
  7. AccuShares Spot CBOE VIX Up Shares (VXUP) will receive a corrective distribution payable in shares of VXDN effective July 20.
  8. BlackRock iShares will perform forward splits on 11 of its ETFs (ITOT, IUSG, IUSV, IUSB, ISTB, IBCC, IBCD, IBCE, IBDB, IBDC, and IBDD) effective July 22.
  9. ProShares will effect ETF splits on July 22.  UGE, UPW, CMD, UXI, and KOLD will undergo forward splits, and GDXS, VIXY, and UVXY will undergo reverse splits.
  10. BlackRock plans to close and liquidate 10 iShares ETFs.  August 23 will be the last day of listed trading for EEML, EMHZ, IEIL, IELG, IEIS, IESM, ITIP, GTIP, QLTB, and QLTC.
  11. The iShares iBonds Sep 2016 Term Muni Bond ETF (IBME) is scheduled to mature and will cease trading at the market’s close on September 1, 2016.

Previous monthly ETF statistics reports are available here.

Disclosure: Author has no positions in any of the securities, companies, or ETF sponsors mentioned.  No income, revenue, or other compensation (either directly or indirectly) is received from, or on behalf of, any of the companies or ETF sponsors mentioned.

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Tuesday, July 19th, 2016

600 ETFs Now Shuttered

By Ron Rowland
8:32 am CDT

The ETF world crossed another major milestone with the delisting of Direxion Daily Total Market Bear 1x Shares (TOTS) before the market opened yesterday (7/18/16).  By itself, the closure of this ETF is not a remarkable event, but in conjunction with the 599 closures that came before it, the TOTS closure brings the lifetime death toll of U.S.-listed ETFs and ETNs to 600.

May 2009 is when the industry reached its first 100-closure milestone.  Since then, each successive round-number increment has occurred on a regular basis, with the other 100-closure milestones taking place in December 2011 (200), October 2012 (300), March 2014 (400), and we crossed the 500 threshold in May 2015.

With a total of nearly 2,540 ETFs and ETNs brought to market in the U.S, these 600 closures represent a mortality rate of 23.6%.  Additionally, 472 products were on ETF Deathwatch for June, and the smallest 1,044 of the 1,931 listings (54%) at the end of June account for only 1% of all ETF assets.  They are clearly not profitable for their sponsors.  Many of these will also not survive, and getting to the 1,000 ETF closure milestone is only a matter of time.

Disclosure covering writer:  No positions in any of the securities mentioned.  No positions in any of the companies or ETF sponsors mentioned.  No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.

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Thursday, June 30th, 2016

Brexit Is Years Away and Might Not Be Bad

By Ron Rowland
7:35 am CDT

I am amazed at all the negative press surrounding the recent U.K. referendum vote in favor of leaving the European Union (“EU”).  Various observers, many of whom are unfamiliar with British politics, have apparently decided that this decision is a bad one.  However, since negotiations haven’t begun, or even been scheduled yet, the details and terms of the exit are completely unknown.  I am not an expert on British or European politics, but I do know that proclaiming the outcome as “bad” at this early juncture would be premature.

Markets reacted negatively to the vote for two reasons.  First, they were caught off guard because the polls leading up to the vote were in favor of the U.K. remaining in the EU.  Second, the EU has been a one-way street since its inception—many nations have been admitted over the years, but no country has ever left before.  This combination of a surprise referendum outcome and the uncertainty created by an unknown exit process caused global markets to pull back.  The media, and much of the public, seized upon this as an opportunity to panic.

The outcome was essentially a vote against the incessant march toward globalization.  The EU was on a path toward centralized government.  Brussels has been placing more and more requirements on member states while simultaneously restricting their independence.  The EU elite, the bankers and politicians controlling this grand experiment in global politics, recognized the vote for what it was and immediately retreated.  The founding member nations of the EU issued a press release stating they will “recognize different levels of ambition amongst member states when it comes to the project of European integration.”

Let that sink in for a while.  The EU elite threw in the towel.  They backed off their hard stance.  They capitulated.  The EU understands that it could crumble unless it softens its stance regarding its desire for complete uniformity across the Union.  The U.K. referendum was a populist victory and a defeat for the elite.  This trend has been building momentum around the world—spanning Europe, crossing the Middle East, and finding support here in the U.S. with the rise of political figures like Bernie Sanders and Donald Trump.  Populism is fast becoming the new global political force.

Despite what the media may lead you to believe, Brexit has not happened yet, and the U.K. is still part of the EU.  So far, there has only been a nonbinding referendum, and the British government is not required to take any action on any specific timetable.  Prime Minister Cameron has indicated he will honor the vote but not lead the country through the process.  Therefore, he tendered his resignation, although there is no clear path to identify and elect a successor that is in favor of separation.

Assuming this eventually gets resolved, nothing changes until the U.K. invokes Article 50 of the Lisbon Treaty.  Article 50 stipulates that a Member State of the EU must give official notification of its intention to withdraw.  Forming a new government and issuing the notification will not occur before the fourth quarter, and 2017 is a distinct possibility.

Once the U.K delivers its notification, the process calls for starting a two-year clock for the U.K. and European Council to negotiate the terms of the exit and obtain approval from the EU bloc.  This is key from a couple of perspectives: It reinforces the fact that the terms of the exit are currently unknown, and it establishes a multiyear timetable for negotiating those terms.  Implementation of the separation agreement is a completely different matter, and it could span many years, with a gradual phase in of provisions.  Therefore, we are probably looking at an implementation of currently unknown provisions that commences in 2019 and extends well into the next decade.

Despite the negative tone regarding the vote, independence is not necessarily a bad thing.  In fact, many of the people that seem to be upset by the result are probably fans of independence.  Here in the U.S., the 50 states want to keep various rights for themselves and not concede total control to the federal government.  For the U.S. to concede much of its independence to Brussels would be bad for the country and intolerable for its residents.  Therefore, why is it so hard to come to grips with the citizens of the U.K. wanting to regain their independence?

 

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Monday, June 20th, 2016

ETF Deathwatch for June 2016: Currency-Hedged Zombies

By Ron Rowland
12:15 pm CDT

Anyone looking for evidence of “trendiness” in ETF launch activity can find it in the recent land rush by sponsors trying to stake their claim in currency-hedged country.  Five years ago, there were only two currency-hedged ETFs listed in the U.S., and the quantity increased by just nine over the two subsequent years.  Today, the category has mushroomed to 103 such funds, and the oversaturation has created 52 currency-hedged zombies on ETF Deathwatch.  Additionally, two currency-hedged ETFs have already bit the dust.

For the 103 currency-hedged ETFs listed for trading at the end of May, 67 of them arrived on the market after the U.S. dollar peaked in value in March 2015.  Therefore, the majority of the product launches occurred when the theme they were trying to exploit—a strengthening dollar—had already exhausted itself for that cycle.  In percentage terms, 65% of the currency-hedged ETFs were late to the party, and 50% are already on Deathwatch.

Thirty-two new names joined the ETF Deathwatch list this month, including seven that use currency hedging.  Five ETFs escaped due to improved health, and five more left via the ETF graveyard.  The net increase of 22 funds pushes the tally even higher into record territory.  For June, the membership count stands at 472 (361 ETFs and 111 ETNs).  This does not include any of the 115 products brought to market in the past six months, because all new funds receive a half-year grace period to establish themselves.

Nearly 25% (472 of 1,902) of all ETFs and ETNs are now on ETF Deathwatch, and their lack of liquidity continues to be one of the primary concerns.  Twenty-four products went the entire month of May without a single trade, and 251 had zero volume on the last day of the month.  Trading concerns are not limited to just these ETFs, because many others also have their weak moments.  In fact, 725 ETFs (38% of all listings) had at least one zero-volume day in May.

The average asset level of products on ETF Deathwatch increased from $6.8 million to $7.0 million, and the quantity of products with less than $2 million in assets fell from 96 to 92.  The average age increased from 46.8 to 47.2 months, and the number of products more than 5 years old jumped from 177 to 187.  Although many newer ETFs are on the list, the statistics point to a problem with older funds.  The average member is closing in on 4 years of age, and 39.6% have been on the market five years or more.  Two of the ETFs have been around for 13.5 years—that is a long time for a sponsor to subsidize a losing product and makes it difficult to forecast a closing date for any these funds.

Here is the Complete List of 472 ETFs and ETNs on ETF Deathwatch for June 2016 compiled using the objective ETF Deathwatch Criteria.

The 32 ETFs and ETNs added to ETF Deathwatch for June:

  1. Alerian Energy Infrastructure (ENFR)
  2. AlphaClone International (ALFI)
  3. BlueStar TA-BIGTech Israel Technology (ITEQ)
  4. Deutsche X-trackers FTSE Developed ex US Comprehensive Factor (DEEF)
  5. Deutsche X-trackers Russell 1000 Comprehensive Factor (DEUS)
  6. Direxion iBillionaire Index (IBLN)
  7. EGShares EM Strategic Opportunities (EMSO)
  8. Etho Climate Leadership U.S. (ETHO)
  9. ETRACS Alerian MLP Index Series B ETN (AMUB)
  10. ETRACS Mth 2x ISE Exclusively Homebuilders ETN (HOML)
  11. ETRACS Mthly Pay 2x DJ Intl Real Estate ETN (RWXL)
  12. First Trust Heitman Global Prime Real Estate (PRME)
  13. First Trust SSI Strategic Convertible Securities (FCVT)
  14. FlexShares Currency Hedged Morningstar DM ex-US Factor Tilt (TLDH)
  15. FlexShares Real Assets Allocation Index Fund (ASET)
  16. iPath Bloomberg Agriculture ETN (JJA)
  17. iShares Currency Hedged MSCI Europe Small-Cap (HEUS)
  18. iShares Currency Hedged JPX-Nikkei 400 (HJPX)
  19. iShares Edge MSCI Min Vol EAFE Currency Hedged (HEFV)
  20. iShares Edge MSCI Min Vol Europe Currency Hedged (HEUV)
  21. iShares Edge MSCI Min Vol Global Currency Hedged (HACV)
  22. iShares Enhanced U.S. Small-Cap (IESM)
  23. Oppenheimer ADR Revenue (RTR)
  24. Oppenheimer Financials Sector Revenue (RWW)
  25. PowerShares Global Agriculture (PAGG)
  26. ProShares Ultra S&P Regional Banking (KRU)
  27. ProShares UltraShort Industrials (SIJ)
  28. ProShares UltraShort Technology (REW)
  29. SPDR S&P Russia (RBL)
  30. VanEck Vectors ChinaAMC China Bond (CBON)
  31. WisdomTree Japan Hedged Quality Dividend Growth (JHDG)
  32. WisdomTree Strong Dollar Emerging Markets Equity (EMSD)

 

The 5 ETPs removed from ETF Deathwatch due to improved health:

  1. First Trust RBA Quality Income (QINC)
  2. FlexShares Credit-Scored US Long Corp Bond (LKOR)
  3. iShares Edge MSCI Min Vol Asia ex Japan (AXJV)
  4. iShares MSCI Colombia Capped (ICOL)
  5. ProShares Ultra MSCI Brazil Capped (UBR)

 

The 5 ETFs removed from ETF Deathwatch due to delisting:

  1. Horizons Korea KOSPI 200 (HKOR)
  2. ProShares CDS North American HY Credit (TYTE)
  3. Direxion Daily MSCI Europe Currency Hedged Bull 2x (HEGE)
  4. Direxion Daily MSCI Japan Currency Hedged Bull 2x (HEGJ)
  5. C-Tracks Citi Volatility Index TR ETN (CVOL)

ETF Deathwatch Archives

Disclosure:  Author has no positions in any of the securities mentioned and no positions in any of the companies or ETF sponsors mentioned.  No income, revenue, or other compensation (either directly or indirectly) is received from, or on behalf of, any of the companies or ETF sponsors mentioned.

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