ETF Deathwatch Criteria for 2011

January 5, 2011 by  
Filed under Commentary, ETF Deathwatch 2011

I’ve been publishing ETF Deathwatch every month for the past 29 months.  When I started, I wanted the criteria to be objective and compiled from data that I could easily access.  I chose to base it on Average Daily Value Traded (ADVT), or what is more commonly known as dollar volume.  The inclusion criteria is simple:  ETFs and ETNs that are at least six months old and fail to generate an ADVT of at least $100,000 in the preceding month will constitute the list.

The reason for the six-month age exclusion is to provide an incubation period for new products to establish themselves.  Even the most successful funds sometimes need time to gain traction.  Sponsors will typically give a new product at least six to nine months before shutting it down, even if it’s an obvious dud.

Dollar volume is critical because it provides real time “level of interest” data.  If there are no trades, then there is clearly no interest, and it is easy to draw the conclusion that assets are also not flowing in.

However, one of the most important criteria has been missing – Assets Under Management (AUM).  For an ETF sponsor, assets drive revenue and help determine profitability.  When I first began the ETF Deathwatch, I did not have the ability to determine ETF asset levels efficiently.  But thanks to the National Stock Exchange, I’m now able to get month-end asset levels of ETFs quickly and accurately.

Basing the list on just one month of trading has led to some unwarranted volatility in the quantity of funds on the list.  A one month lull or spike in ADVT is fairly commonplace.  Today, I unveil the new and improved ETF Deathwatch criteria for 2011:

New ETF Deathwatch Criteria

  1. Products less than six months of age excluded (incubation period).
  2. Products with more than $25 million AUM in either of the past two months excluded.
  3. Products will be added to the Deathwatch list if:  ADVT is less than $100,000 for three consecutive months -or- AUM is below $5 million for three consecutive months.
  4. Products will be removed from Deathwatch if:  ADVT is greater than $100,000 for three consecutive months -and- AUM is greater than $5 million for three consecutive months.

I expect the new criteria will produce monthly lists that are smaller than in the past, and perhaps more important, more accurate and stable from month to month.  Stay tuned – the first ETF Deathwatch for 2011 is coming soon.

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