In his blog earlier this week, Matt called for the closure of
200 more ETFs. Here was his logic:
"The ETF industry works best if investors can trust ETFs to be
liquid and to track closely to their stated index. Today, that's
not always the case. There are 213 ETFs with less than $10 million
in assets under management on the market today. There are 73 ETFs
that traded less than 1,000 shares a day, on average, over the
course of the last month. Investors in many of those funds face
wide spreads and significant liquidity challenges."
Hey, I get it:Sometimes funds are too small to be viable
anymore, and every morning when I look at the ETF Daily Data, I see
the land mines. But to suggest that funds with low average daily
volumes or low assets are untradable-and should thus be shot-is
flat-out wrong and you know it. In many cases, these are funds that
actually serve a valuable function, and whose low visibility could
easily be temporary.
Let's pick a few off the bottom.
The iShares MSCI USA ETF (NYSEArca:EUSA) would likely be at the
top of your bullet-in-the-head list. Its 30-day trailing ADV is
just 114 shares, and has just over 2 million in assets. And for
most investors, its roughly 600-stock portfolio isn't going to be
meaningfully different than an investment in the iShares S&P
500 ETF (NYSEArca:IVV). But for an investor who's fishing from the
MSCI sandbox, consistency across methodologies can be important, so
having a "USA" bucket to round out a country strategy focused on
rotation in and out of developed markets makes sense.
It just may not make sense to Matt.
One of the most interesting things I've seen as we've been
reporting daily flows data is just how resilient some of these
small funds are. The leveraged and inverse product lines of
ProShares and Direxion, for instance, are littered with small funds
that sit dormant for weeks at a time. Then you have a day like
yesterday, when the Direxion Daily BRIC Bear 2X ETF (NYSEArca:BRIS)
trades 10,000 shares in a market 10 cents wide. Not great, but it's
not exactly time to roll up the carpet and call it a night
And it's not just "whacky" trading vehicles that show this kind
of resilience either. The SPDR Barclays Capital Long Term Treasury
ETF (NYSEArca:TLO) was until recently a candidate for Matt's
chopping block, with paltry assets and volume. Yet just yesterday,
it pulled itself up over the 30 million mark with a $6.25 million
net-flows day. Clearly the folks putting that $6 million to work
inside TLO are pretty happy the fund exists.
The whole reason these small funds can be both resilient and
useful is that they're ETFs. In a mutual fund, these piddly assets
would be a death knell; each fund dying under the weight of fixed
costs. But these are ETFs. A $5 million fund in an interesting but
out-of-favor niche can sit comfortably for years until it gets its
moment in the sun and then overnight, it can be a star. Just look
at funds like Vanguard's Long Term Government Bond ETF
Sure, it's a new fund, but there's absolutely no reason to think
that this fund might not have lolled along under $20 million in
assets for another decade in certain market conditions.
We're not the ones who get to decide what's a relevant
investment. The market decides, and I wouldn't have it any other
way. If ETF issuers start shutting down every out-of-favor slice of
the market, those slices won't be available when they become
relevant. It's not like you can get an ETF in the market on a
As usual, the lesson for investors is simple:Be careful. Most
small ETFs are totally ownable, if you're smart with your
Don't forget to check IndexUniverse.com's ETF Data
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