Dow 20,000 Percentages; Materials Sector Assumes Leadership

Not all ETFs and ETNs survive. The days of 100% ETF survival rates are long gone and lasted only until the first closure occurred. Since then, survival has been on a downward trend, recently falling below the 74% level. Equities have historically been the driving force of the ETF industry, claiming the largest quantities of both product launches and assets under management. It should, therefore, come as no surprise that equity ETFs also constitute the largest number of closures. The phenomenal growth rates and innovation of the ETF industry have resulted in many additional asset classes becoming readily available to investors. Today, we will examine ETF survival rates by asset class.

Although it may seem like another equity ETF or two are closing every week, the equity ETF survival rate of 74.0% is actually above the industrywide average of 73.8%. Even though the asset class has undergone 506 closures, it still has 1,442 ETFs listed for trading. Equity ETFs are likely to remain the industry’s bread and butter for years to come.

US ETF Survival Rates by Asset Class, Invest With An Edge

Debt (bonds and fixed-income) ETFs currently have the highest survival rate of any asset class at 78.7%. They are a much smaller group than the equity ETFs, having only about 18% as many launches, but even that small fraction is still enough to make Debt the second-largest asset class among U.S. ETFs.

To be fair, I excluded Defined-Maturity Debt ETFs from the Debt group and placed them in their own asset class. These funds, such as the Guggenheim BulletShares 2018 Corporate Bond ETF (BSCI), essentially announce their closure date on the day they launch. These products are designed to act more like an individual bond with an explicit maturity and liquidation date. Guggenheim launched BSCI on March 28, 2012, stating it would hold bonds maturing in the year 2018, and that it would liquidate and return the money to shareholders at the end of 2018. So far, 19 such ETFs have matured and closed gracefully—not one has met with premature death. Even so, their survival rate currently stands at a respectable 68.3%, although all 41 of the existing products are scheduled to close within the next decade.

Commodities are an asset class that many investors did not have easy access to before ETFs came along. Despite what seems to be an outsized number of leveraged crude-oil ETFs and ETNs meeting their demise, the commodity ETF survival rate is above average at 76.4%. Today, commodities are the third-largest asset class as measured by ETF quantity.

How can the three major (and largest) asset classes of stocks, bonds, and commodities all be “above average” when it comes to survivability? The answer is that the “other” asset classes have such a low survival rate that they bring the average down. These others include currencies, volatility (“VIX”) futures, mixtures (asset-allocation funds), and miscellaneous.

Currencies in an ETF format seemed like a good idea when they first came out, but these ETFs haven’t caught on with investors, and they need more leverage to be of interest to currency traders. Just 33 currency ETFs remain from the 53 that were launched for a survival rate of 62.3%.

Volatility ETFs holding VIX futures contracts are a unique asset class. Unlike commodities, which are also traded with futures contracts, volatility is not tangible—you cannot take delivery of volatility. VIX ETFs are intended for active traders, and of the 36 VIX ETFs launched, just 19 remain, producing a survival rate of 52.8%.

The survival rate for ETFs with a mixture of assets is surprisingly low at 64.9%. Asset-allocation strategies, those holding a mixture of stocks, bonds, and commodities, would seem to be a natural fit for the ETF format. However, for reasons that remain head-scratchers, both iShares and Deutsche X-trackers abandoned their lineups of “target-date” ETFs. Not to be confused with the defined-maturity ETFs described above, target-date funds attempt to provide a portfolio with an asset mixture that becomes more conservative each year. For example, a 2040 target-date fund is intended for people who plan to retire in the year 2040. Today, that fund would be mostly stocks but would gradually shift toward bonds each year. These funds would not mature and liquidate in 2040, but they could potentially be merged into an “in-target” fund at some point. For now, these target-date strategies are available in mutual funds, but not in ETFs.

You are probably wondering about the two ETFs unable to fit into any of the previously defined asset classes and had to be categorized as Miscellaneous. These are the infamous MacroShares Major Metro Housing Up (former ticker UMM) and Down (former ticker DMM) ETFs. These ETFs did not invest in anything, and did not attempt to track anything with daily pricing. MacroShares marketed them as tracking the Case-Shiller Major Metro Housing Price Index, but the teeter-totter design and implementation were seriously flawed. While it can be argued that housing is indeed an asset class, it is not a liquid one. These ETFs did not have any underlying equity, debt, commodity, or other instruments to invest in. The survival rate of ETFs with an undefined “miscellaneous” asset class is 0%.

Keep in mind, the ETF survival rates presented here represent what has happened as of April 30, 2017. It is based on the 710 closures that have occurred to date. The next 710 closures might tip the scales in another direction. As always, the future remains unknown, but the ETF Deathwatch might help you avoid being caught owning an ETF that fails to survive.

Not Much Change Leading Up to FOMC Meeting

There was little to no anticipation leading up to the FOMC meeting that concluded today. This lack of attention was apparently for good reason, as the Federal Reserve revealed nothing of any significance in its post-meeting press release. Technology, Momentum, and the Eurozone continue to provide the market leadership for their respective groups in today’s Weekly Edge.

Sectors: Technology, Consumer Discretionary, and Health Care were the only three sectors gaining momentum this past week, and they also happen to be the three top-ranked sectors. Health Care was the big mover, jumping from eighth to third, while Technology and Consumer Discretionary were in the top-two slots a week ago. All ETFs within the Health Care sector posted improvements, but the iShares U.S. Healthcare Providers ETF (IHF) turned in the best results. Vanguard Financials (VFH) was the only other one of the Sector Benchmark ETFs that rose in the rankings, moving two spots higher. Utilities and Telecom both fell two places lower, while many others slipped a notch. Energy was already at the bottom and unable to drop any further on a relative-strength basis. However, Energy fell deeper into the red.

Factors: Similar to the action in sectors, only three of the Factor Benchmark ETFs posted momentum gains over the past week. Momentum, Growth, and Market Cap were the three that gained, and it was enough to allow Market Cap to climb a notch to fourth place, putting it closer to the leaders at the top. Value was the only other factor improving its relative-strength position, and this improvement was the result of High Beta posting the largest momentum decline of the group and falling lower. This puts High Beta in a virtual tie for last place with Yield. Both are now hanging on to their last slivers of positive momentum and face the potential of being in the red by next week.

Global: Unlike the sectors and factors, where only three categories could manage a positive momentum change, all but one of the Global Benchmark ETFs posted improvements. The odd man out is Canada, which extends its stay on the bottom and is now 10 points in the red. Strength in the Eurozone continues to propel international markets, and the iShares MSCI Eurozone ETF (EZU) is heads above the crowd with a momentum score of 45. Broader European ETFs are nearly as impressive, with Vanguard FTSE Europe (VGK) posting a score of 39. EAFE, Emerging Markets, and China occupy the second through fourth positions, just as they did a week ago. The U.K., Pacific ex-Japan, and World Equity are in a three-way tie for the middle ground, leaving the U.S., Latin America, Japan, and Canada in below-average positions. Said another way, the major continents of the Western Hemisphere plus Japan are lagging global markets.

The following Edge Charts are market momentum snapshots. They provide a quick and easy way to help you visually get a handle on the overall state of the market. With these charts, you can assess both the relative strength and absolute strength (momentum) of more than 30 global equity market segments. Please refer to the Edge Chart User’s Guide for further explanation.

Weekly Edge 050317, Sector Edge, Factor Edge, Global Edge, Invest With An Edge


“This survival of the fittest, which I have here sought to express in
mechanical terms, is that which Mr. Darwin has called ‘natural selection’,
or the preservation of favoured races in the struggle for life.”

—Herbert Spencer, in Principles of Biology (1864)

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