Perhaps the worst number to come along in the history of
exchange-traded products is $100 million. As in $100 million in
assets under management means the fund is "good," it will survive
and it is now profitable for the issuer.
The addiction to the $100 million in AUM equals a good ETF
theory perhaps stems from a flawed report
that used the number. That report takes a one-size-fits-all
approach with the $100 million theory, but the reality is a
fund's expense ratio plays a large part in the profitability of
an ETF. Multiply an ETF's AUM by its expense ratio and there is
an indication of the fund's revenue.
The $100 million in AUM number also does not take into account
an ETF manager's ability to make money through securities
lending, licensing fees or other external costs related to ETF
management. Nor does it consider partnerships such as the one
between Invesco's (NYSE:
) PowerShares and Deutsche Bank (NYSE:
) on ETFs such as the PowerShares DB Dollar Bullish (NYSE:
In other words, the $100 million in AUM theory when it comes
to ETFs is a lot
of malarkey and that much has been proven
. Still, some are attached to the number like they are attached
to an old college fraternity sweatshirt wives beg husbands to get
References to 1980s movies aside, a fatal attachment might be
different than a fatal attraction, but both are fatal. In this
case, it is investors' portfolios that suffer on the advice that
sub-$100 million ETFs should be shunned like Hester Prynne.
equity-based ETFs with less than $100 million in AUM that have
gained at least 20 percent
year-to-date. Some are actually well known given their diminutive
status. Others are not as risky as investors might have been lead
Even by treating the Market Vectors Egypt ETF (NYSE:
) and its almost 61 percent year-to-date pop as an outlier, there
are still plenty of noteworthy performances among sub-$100
million AUM funds. Actually, EGPT should not be treated as an
outlier because the ETFs has
), Amazon (NASDAQ:
) and Google (NYSE:
) this year. Apple is the closest and it still lags EGPT by more
than 500 basis points.
Speaking of Egypt, a case can be made that the country's 19.1
percent weight in the Market Vectors Africa ETF (NYSE:
) gain almost 22 percent this year. Naysayers would assert
neither AFK nor EGPT are cheap. That would be correct as the
funds charge 0.78 percent and 0.94 percent per year,
respectively. So the average expense ratio between the two is
0.86 percent, but that comes nowhere close to putting a dent into
an average gain north of 40 percent.
The List Goes On
Investing in Africa is an acquired taste. Given elevated
political volatility and opaque legal systems, among other
concerns, it is understandable that some investors would want to
pass on the continent. Still, are plenty of ETFs with less than
$100 million in assets that have been on fire this year.
There is the case of the PowerShares Dynamic Building &
Construction Portfolio (NYSE:
). Under normal circumstances, PKB's 31 percent year-to-date gain
would be impressive, but its larger rivals, the iShares Dow Jones
US Home Construction Index Fund (NYSE:
) and the SPDR S&P Homebuilders ETF (NYSE:
) are up 63.2 percent and 44.2 percent, respectively.
While it is understandable that PKB has been overshadowed by
its larger rivals, it is odd that with all the praise being
heaped on shares of home builders this year, that this $41.5
million ETF does not get much press.
Staying at the sector level, investors that have opted for the
giant Consumer Discretionary Select Sector SPDR (NYSE:
) have been rewarded with a gain of 18.5 percent this year. They
could have done better with the PowerShares Dynamic Leisure and
Entertainment Portfolio (NYSE:
), which is up almost 21 percent.
PEJ, which has $53.1 million in AUM, is another example of
some experts creating too much drama around low asset ETFs. The
ETF is not home to obscure stocks as Yum! Brands (NYSE:
) and Walt Disney (NYSE:
), among other recognizable names, are found in PEJ's lineup.
PEJ's average daily volume of just over 32,000 shares may not
sound like much, but most of its underlying components are
heavily traded, ensuring sufficient liquidity for the fund.
On a related note, the PowerShares S&P SmallCap Consumer
Discretionary Portfolio (NASDAQ:
), which was designed to be the small-cap rival to XLY, has
outperformed its large-cap cousin this year as well. PSCD is up
almost 20 percent and has just $61.7 million in AUM.
Heading back overseas, investors need not have taken on
excessive risk with sub-$100 million ETFs this year. Indeed, the
aforementioned AFK and EGPT do qualify as "risky." There is also
a fair number of other emerging markets funds that have surged
more than 20 percent this year despite having less than $100
million in assets.
Investors could have skirted the emerging markets risk by
heading to developed Europe. For example, the iShares MSCI
Belgium Investable Market Index Fund (NYSE:
) has gained almost 20 percent this year. That move is due in
large part to bullishness in Anheuser-Busch InBev (NYSE:
), which accounts for 23.5 percent of EWK's weight. That ETF has
less than $29 million in AUM.
Critics would likely assert that risk is elevated with EWK
because Belgium is a Eurozone member. Fair enough, but there is
an answer. Investors could have avoided that risk and gained
better returns by
turning to Nordic ETFs
. The Global X FTSE Nordic Region ETF (NYSE:
) and the Global X Norway ETF (NYSE:
) are up 20.1 percent and 22.3 percent, respectively,
solid GDP growth, a massive sovereign wealth
and pristine balance sheet, assuming that the biggest risk to
NORW is that is has less than $100 million in assets borders on
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