November marked the largest month of inflows for exchange-traded funds (“ETFs”) for the year, but exchange-traded notes (“ETNs”) experienced net outflows. Investors added $50.8 billion to their favorite ETFs, while withdrawing nearly $1.3 billion from ETNs. The failure of ETNS to attract new investments during a positive market environment is a symptom of investor distrust in the products and the banks behind them.
Sponsors brought out 13 new products in November, and nine went by the wayside. The net increase of four puts the overall count at 1,941 (1,752 ETFs and 189 ETNs). The quantity of actively managed ETFs increased by two to 161. Industry assets grew by 3.3% to $2.46 trillion.
ETNs are exchange-traded notes, which means they are a single-issuer bond and not a fund organized as a separate entity such as mutual funds and ETFs. Even bond mutual funds and bond ETFs are organized as separate entities, making them impervious to the financial conditions of the sponsors. However, ETNs, even when they are tracking a stock or commodity index are still a bond, or as their literature states, they are uncollateralized debt obligations of the issuer.
Two of the new product introductions in November were ETNs. However, if you look closely, you’ll notice they were not actually new. Rather, they were replacement products for other flawed ETNs. Barclays ETN+ FI Enhanced Europe 50 ETN Series B (FLEU) is a replacement for the Barclays ETN+ FI Enhanced Europe 50 ETN (FEEU), and the iPath Series B S&P GSCI Crude Oil ETN (OILB) is a replacement for the iPath S&P GSCI Crude Oil ETN (OIL). The two products being replaced are still listed, but Barclays is no longer issuing new shares.
Halting share issuance is commonplace among ETNs, and it reduces them to being broken products where market makers are unable to keep market prices in line with the underlying net asset values. In fact, all but four of the more than 65 broken products are ETNs.
Surprise closings and redemptions are also an inconvenience that adds to investor distrust of ETNs. The UBS ETRACS leveraged MLP ETNs, with more than $200 million in assets, encountered anti-ruination triggers with automatic early redemptions back in January. In August, UBS closed and liquidated nine ETNs with $293 million in assets. Deutsche Bank closed and liquidated 10 ETNs in September, and all of their remaining ETNs are broken.
Then we come to Credit Suisse. Credit Suisse has been notorious for its flippant attitude toward investors in its ETNs. They have a history of delisting products without liquidating them in a timely manner, depriving shareholders of easy access to their money. In November, Credit Suisse took shareholder-unfriendly actions against more than $2.2 billion worth of ETN assets.
First was the Credit Suisse X-Links Cushing MLP Infrastructure ETN (MLPN), which briefly held the title of second-largest ETP closure ever. The $508 million in assets in the ETN when the closure was announce on November 8, was second only to the $600 million in the PowerShares DB Crude Oil Double Long ETN (former ticker DXO) that took place seven years ago.
Eight days later, Credit Suisse announced its intent to take additional successful products off the market by delisting the $1.56 billion VelocityShares 3x Long Crude Oil ETN (UWTI) and the $226 million VelocityShares 3x Inverse Crude Oil ETN (DWTI) after the close on December 8. However, to make matters worse, Credit Suisse decided against automatically redeeming the notes and returning money to shareholders. This story is still being played out, and updates can be found here.
The quantity of U.S.-listed ETNs peaked at 218 more than four years ago. Today’s quantity of 189 is not yet a disastrous decline, but a few more months like November will wake investors up to the additional risks and headaches associated with ETNs.
|November 2016 Month End||ETFs||ETNs||Total|
|Currently Listed U.S.||1,752||189||1,941|
|Listed as of 12/31/2015||1,644||201||1,845|
|New Introductions for Month||11||2||13|
|Delistings/Closures for Month||8||1||9|
|Net Change for Month||+3||+1||+4|
|New Introductions 6 Months||113||8||121|
|New Introductions YTD||201||15||216|
|Net Change YTD||+108||-12||+96|
|Assets Under Management||$2,437 B||$22.2 B||$2,459 B|
|% Change in Assets for Month||+3.4%||-4.7%||+3.3%|
|% Change in Assets YTD||+16.2%||+3.3%||+16.1%|
|Qty AUM > $10 Billion||55||0||55|
|Qty AUM > $1 Billion||278||5||283|
|Qty AUM > $100 Million||825||34||859|
|% with AUM > $100 Million||47.1%||18.0%||44.3%|
|AUM Flows for Month||+$50.8 B||-$1.29 B||+$49.5 B|
|AUM Flows YTD||+$232.2 B||+$0.98 B||+$233.2 B|
|Monthly $ Volume||$1,823 B||$77.6 B||$1,901 B|
|% Change in Monthly $ Volume||+38.5%||+12.8%||+37.2%|
|Avg Daily $ Volume > $1 Billion||14||1||15|
|Avg Daily $ Volume > $100 Million||103||6||109|
|Avg Daily $ Volume > $10 Million||363||11||374|
|Actively Managed ETF Count (w/ change)||161||+2 mth||+24 ytd|
|Actively Managed AUM||$28.6 B||+1.7% mth||+24.7% 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 November (sorted by launch date):
- American Customer Satisfaction Core Alpha ETF (ACSI), launched 11/01/16, will track the American Customer Satisfaction Investable Index, which consists of large-cap U.S. equities with individual companies weighted within each sector by their ACSI customer satisfaction scores. The ETF uses customer satisfaction as an optimizing portfolio factor, providing overweight exposure to the most loved products and services. It has an expense ratio of 0.65% (ACSI overview).
- Direxion Daily CSI China Internet Index Bull 2x Shares (CWEB), launched 11/02/16, seeks daily investment results that are 200% of the performance of the CSI Overseas China Internet Index. Its expense ratio is capped at 0.95% (CWEB overview).
- Barclays ETN+ FI Enhanced Europe 50 ETN Series B (FLEU), launched 11/03/16, provides leveraged exposure to the STOXX Europe 50 USD (Gross Return) Index. The initial 200% exposure is reset only quarterly, so the market exposure on any given day will be a function of the underlying index’s return since the last rebalance date. The ETN appears to be customized for Fisher Investments and is not included on Barclay’s ETN+ website. Expenses include a 0.05% investor fee and an exposure fee of 0.76% plus three-month LIBOR of 0.94%, for an estimated total fee of 1.75% (FLEU filing).
- Goldman Sachs Hedge Industry VIP ETF (GVIP), launched 11/03/16, seeks to track the GS Hedge Fund VIP Index, which is constructed using a rules-based methodology. The Index consists of fundamentally driven hedge-fund managers’ “Very-Important-Positions,” which appear most frequently among their top-10 long equity holdings (from 13F filings). The Index constructs a focused, U.S.-listed stock portfolio of approximately 50 holdings using equal weighting, and the ETF carries an expense ratio of 0.45% (GVIP overview).
- iShares Core 5-10 Year USD Bond ETF (IMTB), launched 11/03/16, seeks to track the investment results of an index composed of U.S. dollar–denominated bonds that are rated either investment-grade or high yield and have remaining effective maturities between five and 10 years. Holdings can include government, corporate, securitized, and emerging-market bonds. High-yield debt currently has a 10% allocation. The ETF has an effective duration of 5.45 years and an estimated yield of about 3.2%. Its expense ratio is capped at 0.08% (IMTB overview).
- WisdomTree Dynamic Currency Hedged International Quality Dividend Growth Fund (DHDG), launched 11/03/16, seeks to track the investment results of developed market companies, excluding the U.S. and Canada, with growth and quality characteristics while at the same time dynamically hedging exposure to foreign currency fluctuations. The underlying index is composed of the top 300 companies with the best combined rank of growth and quality factors. The growth factor is long-term earnings growth expectations, while the quality factor uses the three-year historical averages for return on equity and return on assets. Companies are then weighted by annual cash dividends. The ETF’s current yield is about 2.3%, and it has an expense ratio of 0.48% (DHDG overview).
- USCF Restaurant Leaders Fund (MENU), launched 11/08/16, tracks an index of U.S.-listed small-, mid-, and large-capitalization companies in the restaurant industry. The underlying smart-beta methodology uses a four-step selection process that includes two quantitative screens and two dynamic screens. The ETF will hold 30 to 40 stocks with 70% allocated to quick-service restaurants and 30% to full-service restaurants. It employs equal weighting within each segment and caps its expense ratio at 0.65% (MENU overview).
- Global X MSCI SuperDividend EAFE ETF (EFAS), launched 11/15/16, seeks investment results that correspond to the MSCI EAFE Top 50 Dividend Index. The ETF has an estimated yield of 5.6% and an expense ratio of 0.55% (EFAS overview).
- JPMorgan Diversified Return U.S. Small Cap Equity ETF (JPSE), launched 11/16/16, seeks investment results that closely correspond to the performance of the Russell 2000 Diversified Factor Index. It combines risk-based portfolio construction with multifactor security selection. The factors include value, quality, and momentum. Its expense ratio is capped at 0.39% (JPSE overview).
- Janus Short Duration Income ETF (VNLA), launched 11/17/16, is an actively managed fixed-income ETF that seeks to provide a steady income stream with capital preservation across various market cycles. Its stated goal is to outperform the LIBOR three-month rate by a moderate amount through various market cycles while providing low volatility. The ETF is designed to move beyond conventional constraints and provide positive absolute returns by investing in global securities. It comes with an expense ratio of 0.35% (VNLA overview).
- iPath Series B S&P GSCI Crude Oil ETN (OILB), launched 11/18/16, is an ETN designed to provide exposure to the S&P GSCI Crude Oil Total Return Index. The ETNs are unsecured debt obligations of the issuer, Barclays Bank PLC. The underlying index reflects the returns that are potentially available through an unleveraged investment in West Texas Intermediate crude-oil futures contracts. This is a newer version of the iPath S&P GSCI Crude Oil ETN (OIL), which is now a broken product no longer issuing new shares. The new ETN has an expense ratio of 0.45% (OILB overview).
- Legg Mason Emerging Markets Low Volatility High Dividend ETF (LVHE), launched 11/18/16, seeks to track an index composed of equity securities of emerging markets with relatively high yield, low price, and low earnings volatility—not price volatility. The underlying index screens for profitable companies that have the potential to pay relatively high sustainable dividend yields. The securities are scored on the attractiveness of their price and earnings volatility. Portfolio construction employs concentration limits for individual components, sectors, countries, and geographic regions. LVHE has an expense ratio of 0.50% (LVHE overview).
- FlexShares Core Select Bond Fund (BNDC), launched 11/21/16, is an actively managed fund-of-funds that seeks total return and preservation of capital. Northern Trust, the fund’s manager, uses a top-down approach to construct a fixed-income portfolio of U.S. dollar investment-grade ETFs. It adjusts to potential changes in interest rates, the shape of the yield curve, and credit spreads, while emphasizing liquidity and diversification. The ETF currently has an effective duration of 5.8 years, an estimated yield of 2.8%, and an expense ratio capped at 0.35% (BNDC overview).
Product closures in November and last day of listed trading:
- TrimTabs Intl Free-Cash-Flow (FCFI) 10/31/16
- SPDR Financial Services Select Sector (XLFS) 11/14/16
- SPDR MSCI International Real Estate Currency Hedged (HREX) 11/14/16
- SPDR MSCI Mexico StrategicFactors (QMEX) 11/14/16
- SPDR MSCI South Korea StrategicFactors (QKOR) 11/14/16
- SPDR MSCI Taiwan StrategicFactors (QTWN) 11/14/16
- ETFS Diversified-Factor Developed Europe (SBEU) 11/21/16
- ETFS Diversified-Factor U.S. Large Cap (SBUS) 11/21/16
- CS X-Links Cushing MLP Infrastructure ETN (MLPN) 11/25/16
Product changes in November:
- Horizons ETF Management announced on November 1 its intent to acquire the four Recon Capital ETFs (DAX, QYLD, USMR, and BMLA).
- The iShares Real Estate 50 ETF (FTY) changed its index, name, and ticker effective November 3, becoming the iShares Core U.S. REIT ETF (USRT).
- Ten iShares ETFs underwent reverse splits effective November 7.
- Effective November 17, the iPath S&P GSCI Crude Oil ETN (OIL) suspended issuance of new units, making it a broken product.
Announced product changes for coming months:
- Credit Suisse to delist, suspend issuance, but not liquidate the VelocityShares 3x oil ETNs after the close on December 8.
- The Restaurant ETF (BITE) will close and liquidate after the close of trading on December 22.
- Guggenheim BulletShares 2016 Corporate Bond (BSCG) and Guggenheim BulletShares 2016 High Yield Corporate Bond (BSJG) are set to mature and terminate at the end of the year. The final day of listed trading will be December 29, 2016, with the complete maturity distribution payable the following day.
- Beginning on or around January 23, 2017, the iShares Core Russell U.S. Value ETF (IUSV) will track a new underlying index, the S&P 900 Value Index. The iShares Core Russell U.S. Growth ETF (IUSG) will track the S&P 900 Growth Index.
- The ETFS Zacks Earnings Large-Cap U.S. Index Fund (ZLRG) and ETFS Zacks Earnings Small-Cap U.S. Index Fund (ZSML) will close and liquidate after the close of trading on January 23.
- Dhandho Junoon ETF (JUNE) shareholders approved the reorganization and acquisition of the fund by Cambria. The transaction is expected to close on January 23, 2017.
- Horizons ETF Management announced on November 1 that it intends to acquire the four Recon Capital ETFs (DAX, QYLD, USMR, and BMLA) with the transition expected to be finalized in 1Q 2017.