Dead ETFs Walking

They are still listed. There have not been any press releases announcing closure. Trading volume has gone to zero. In some cases, the market maker has abandoned his post. These are the living dead of the ETF world - products abandoned by their sponsors, shunned by the public, or both.

It is not unusual for a relatively new ETF to go all day without any trades. In fact, 49 ETFs registered zero volume for Thursday, March 5, 2009. In case you are wondering, there are 843 ETFs and ETNs listed in the U.S., so nearly 6% of them had no trades that day. One product last traded on February 20. Five products have yet to trade in the month of March:

• PowerShares DB Base Metals Long ETN (BDG)
• SPDR S&P International Consumer Discretionary (IPD)
• E-TRACS CMCI Short Platinum Excess Return ETN (PTD)
• PowerShares FTSE Nasdaq Small Cap (PQSC)
• Claymore U.S. Capital Markets Bond ETF (UBD)

What happens when ETFs go day after day after day without any trades? For some, it seems as though the sponsor is in denial - hoping that once the market turns, investors will discover their ETF and money will come flooding in. Eventually, the sponsor will be forced to take notice.

For others, the sponsor has already written them off and told the market makers to go home. For these, it appears to be a matter of timing - the sponsors are likely considering the closure of multiple funds, and we should expect the press release soon.

They are the dead ETFs walking - still alive and listed, but destined for closure and liquidation.

Background: The phrase “dead man walking” was introduced one hundred years ago by Thomas Hardy in the poem The Dead Man Walking.

Disclosure: No positions in the mentioned securities.

Comments

[AlphaDude:]

Great heads up article, I've noticed Etf's with no volume and wondered. I'm a big fan of ETF's and use them as a large % of my portfoilio. Good reminder to do good Due Diligence before any purchase.

Mar 08 05:17 PM

[Steven Hansen:]

unlike mutual funds, it there really much cost to keeping the etf active? the market makers usually have a portfolio of etf's and having one not active just ties up a little capital

Mar 09 02:10 AM

[donzelion:]

I would think that the costs of maintaining a listing for an ETF would be pretty minimal. You're looking at under $50,000 for your annual listing fee (I think it's $27,500 maintenance at NYSE), plus the annual audits, disclosure statements, etc. For a generally inactive ETF, those costs ought to be trivial (er, well, at least in comparison with mutual funds).

As long as you have assets over USD $10 mill, you should take in enough to keep the ETF going without heavy cost to the issuer if the annual expense ratio stays under .5%.

Mar 09 07:08 AM

[pdwst33:]

Basically it's up to the issuer's solvency. Having ETFs with little volume is obviously not desirable, but it all depends on the sales/distribution effort, and it becomes largely a judgment call on the ETF issuer's part whether or not they want to close the doors. That said, a company with a few profitable ETFs can easily sustain a few other products in their lineup that might not have any trading volume since the costs of running them are minimal and fixed for the omst part. Lose a bit here, make it up somewhere else, etc etc.

Mar 10 08:36 AM