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Argument For Low Volume ETFs Gains Steam
10/1/2012 1:07:00 PM
It has been duly noted that ETF trading and investing is a numbers game. To that end, many experts treat this numbers game the way they would drafting a fantasy football league. That is to say certain numbers become etched in stone as criteria for judging an ETF's value.
While it is advisable to draft a quarterback for one's fantasy football team that threw for more than 4,000 yards in the prior season, things are not that cut and dry when it comes to ETFs. In fact, it is fairly easy to find plenty of ETFs that are "plagued" by low assets and/or low average daily volume that are delivering in terms of returns .
A list of the top-10 performing non-leveraged equity ETFs year-to-date compiled by Index Universe shows that there is little to no correlation between what experts have deemed "good" volume and what most investors would view as strong returns.
The Index Universe list features data through September 27 and as of that date, the Market Vectors Egypt ETF (NYSE: EGPT ) was the leader with a year-to-date surge of 66 percent. EGPT's three-month trailing ADV is less than 71,600 shares and that number is up soared in September as EGPT was rallying. Said differently, just five or six weeks ago, EGPT's volume was not even as high as it is now, but below 100,000 shares per day, many experts would not even touch the ETF.
Cleary, that has proven to be a mistake as EGPT stands as a shining example of low AUM/low ADV ETF's ability to deliver stellar returns for investors.
The ETF's in the second and fourth spots on the list are the heavily traded iShares Dow Jones US Home Construction Index Fund (NYSE: ITB ) and the rival SPDR S&P Homebuilders ETF (NYSE: XHB ). Sandwiched in between in those two is the Market Vectors Biotech ETF (NYSE: BBH ).
Traders and investors not living in caves know that 2012 has been an excellent year for biotech stocks and ETFs. In fact, four of the 10 ETFs on the Index Universe list are biotech funds. What is interesting is the order in which those ETFs fall. With ADV of barely over 28,000 shares, BBH is the third-best performing traditional long ETF of any kind this year and tops among the biotech funds.
Number five on the list is the not anonymous, though still lightly traded First Trust NYSE Arca Biotech Index Fund (NYSE: FBT ). FBT has ADV of just over 50,000 shares per day.
Bottom line: BBH and FBT have trumped more voluminous rivals suhc as the SPDR S&P Biotech ETF (NYSE: XBI ) and the iShares Nasdaq Biotecnology Index Fund (NYSE: IBB ). XBI and IBB occupy the seventh and ninth spots on the Index Universe list.
In the tenth spot is the iShares FTSE EPRA/NAREIT Developed Asia Index Fund (NYSE: IFAS ), which had returned 32 percent through September 27. IFAS, which is dominated by weights to Hong Kong, Japan and Australia, has just $28.4 million in AUM and ADV barely over 6,900 shares.
Keeping with the Asian real estate theme, the Guggeneheim China real estate ETF (NYSE: TAO ) is in the number eight spot on the Index Universe list. TAO sees average turnover of about 23,500 shares per day. Apparently that is enough for the fund to have gained 35 percent year-to-date.
Arguably, what is noteworthy is not that this new list is surprising. It is not, but it does fortify data from other sources released earlier this year indicating low volume ETFs are not so bad. What is noteworthy and problematic is that so many investors, professionals included, are using volume as a determinng factor in evaluating an ETF's potential to deliver alpha in the future.
For more on ETF volume, click here .
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