An article in this weekend's Wall Street Journal about ETFs with dwindling market caps caught our attention. More and more ETFs seem to be trading hardly any volume these days, and many have already liquidated or announced plans to liquidate in the future. As Wall Street usually does with everything, it seems to have gone overboard with ETFs, creating too many too fast. Eventually only the biggest and strongest will survive.
We looked at more than 700 US ETFs and ETNs to see which ones are struggling the most with low market caps and volume. The average market cap of all ETFs we looked at was about $816 million, but 131 (about 18%) have market caps lower than $10 million. The market cap of the largest ETF, SPY, is also greater than the sum of the market caps of the smallest 596 (84%) ETFs. Talk about income inequality! The article notes that anything less than $50 million "probably loses money for the firm that sponsors it."
With that in mind, the ones below are probably in the biggest trouble. As shown, the Healthshares ETFs make up the majority of the list of ETFs with the lowest market caps. Some of these average less than 100 shares a day (HHT, HRW). We also filtered the list to get rid of the Healthshares ones. The ETFs in the second table below have the lowest average 30-day volume with market caps less than $5 million (ex-Healthshares). As shown, SSK, GCE, MZN and WSI top the list, with average volumes of less than 600 shares a day.
Just because an ETF specializes in a strategy that seems attractive doesn't make it a good investment. In additions to fees, it's important to take volume and liquidity into account for ETFs just as it is for all asset classes. It's never good to get stuck holding something because the spreads are so wide or the bids just aren't there at all, and with a lot of ETFs trading less than 1,000 shares a day, it's easy to run into this problem if you're not careful.
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