Invest With An Edge

ETF Stats for June 2016: More Teeter-Totter Failures

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:

  • Claymore/MacroShares Oil Up (UCR) and Down (DCR).  They launched 11/30/06 and died 6/25/08 because they couldn’t handle oil prices above $111.
  • MacroShares $100 Oil Up (UOY) and Down (DOY).  They launched 7/1/08 and were designed to overcome the limitations of UCR/DCR.  They closed less than a year later on 6/25/09 because the large price premiums and discounts kept investors away.
  • MacroShares Major Metro Housing Up (UMM) and Down (DMM).  These launched 6/30/09 and failed miserably less than six months later.  Despite being named one of the “Best Inventions of 2008” by Time Magazine, I warned investors about their shortcomings and listed 10 reasons why they would not reflect housing prices.  They went down in flames, and adding insult to injury, charged remaining shareholders more than a 3% termination fee.
  • AccuShares Spot CBOE VIX Up Fund (VXUP) and Down (VXDN).  Launched 5/19/15, these ETFs received much favorable press attention due to the misleading use of the word “Spot” in their names.  I warned investors that these products would not track spot prices.   Additionally, a review of the distribution history of VXUP shows that in addition to seven return-of-capital distributions that lowered the share value to less than $4, each share of VXUP has received three shares of VXDN.  Performance is impossible to calculate, and the premium as of 7/21/16 was 18.2%.

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 End ETFs ETNs Total
Currently Listed U.S. 1,729 202 1,931
Listed as of 12/31/2015 1,644 201 1,845
New Introductions for Month 31 1 32
Delistings/Closures for Month 1 2 3
Net Change for Month +30 -1 +29
New Introductions 6 Months 116 8 124
New Introductions YTD 116 8 124
Delistings/Closures YTD 31 7 38
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 Billion 55 0 55
Qty AUM > $1 Billion 261 5 266
Qty AUM > $100 Million 803 36 839
% with AUM > $100 Million 46.4% 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 Billion 11 2 13
Avg Daily $ Volume > $100 Million 100 6 106
Avg Daily $ Volume > $10 Million 314 11 325
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.