Bloated array of ETFs results in liquidations |
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"Generally, when it gets below $10 million, put it on your radar to start watching, because $10 million can quickly
fade to $5 million with poor returns or sector rotations. This can happen especially if the gimmicky fad it was following is now
falling out of favor. If it drops to $5 million, it has a good chance of going away very soon."
Not only fads fail
But it doesn't have to be a fad to fail. As mentioned, Ameristock/Ryan
flopped in its attempt to launch five ETFs pegged to various Treasury
bonds. Experts say the ETF Treasury market is saturated and major,
better-known ETF providers such as Barclay's iShares have already
invaded that turf.
David Fry, founder of ETF Digest, says ETF failures will become more common. "You have this great race of
people trying to cover as many sectors as they can and there's a lot of redundancy. Generally, the first one to issue a
particular sector is the one that's going to get most of the assets."
Fry says he likes to see assets of at least $25 million for a seasoned ETF -- one that's been around for a
while. He also advises investors to look at trading volume relative to the sector. If most of the ETFs in a particular sector
are trading an average of 200,000 shares a day, then it may be best to consider one trading that much or more.
Another consideration is fees -- but lower isn't always
better. "If one is charging 20 basis points a year in fees, but
it trades consistently to its index versus one that charges 15 basis
points but is kind of sloppy, then I would prefer the one that charges
20 basis points," Fry says.
How to invest
The stream of ETFs isn't likely to let up any time soon. Fry estimates that hundreds of ETFs will be issued over the next six
months or so. Consider waiting several months before buying shares of a new ETF and make sure it meets the needs of your
portfolio and your interests.
Comparing the fundamentals of various ETFs is easy.
The following example compares data points for four midcap value
ETFs. You can find this information by using Web sites such as Morningstar
and Yahoo or the Web site of the issuer, such as Vanguard, Fidelity,
Barclay's iShares and the like. In addition, look at how the ETF
performed against its benchmark index and how the two of them compare
with the category itself, such as in this case, midcap value.
If your ETF closes ...
If you're invested in an ETF that shuts down, you should be notified by the issuer in advance and told the date that the fund
will stop trading. You can sell your shares before the trading deadline or you can wait for the fund's underlying securities to
be liquidated and receive cash for your shares.
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