The month of May brought the largest monthly decline ever in the number of US-listed ETFs and ETNs. Active listings changed by -14 after averaging more than +17 new products per month during the past three calendar years. Additionally, the six-month moving average of net new listings turned negative for the first time in history.

There were five new ETFs introduced during the month and 19 closures. The total number of listed products at the end of May stands at 830 (745 ETFs and 85 ETNs), the lowest level since last October. The quantity is down 15 from the start of the year and down 29 from the peak level of 859 established in early February prior to the closure of the Northern Trust NETS family of ETFs.

In the exciting world of ETFs, every day seems to bring an announcement of a new fund launch. So PowerShares' announcement earlier this month that it will shut down nearly 15% of its ETFs may have come as a shock to many investors.

But don't be alarmed. ETFs are still gaining rapidly in popularity, with some experts suggesting the industry will top the $1 trillion in assets mark before the end of the year. The ETF industry right now is in a "10 steps forward, 1 step back" mode, and the closure of these funds is nothing more than a small speed bump on an otherwise promising path.

On May 1, 2009, Invesco (IVZ) PowerShares Capital Management LLC announced that it would be closing 19 ETFs on May 18. Shareholders of record on May 18 will receive cash equal to the amount of the net asset value of their shares as of May 22. That cash value should include any capital gains and dividends left in the cash portion of investors’ brokerage accounts, according to PowerShares. While the shuttering of these 19 ETFs may not come as a surprise to some investors, especially in light of earlier ETF closings in 2008, they nonetheless change the landscape of the ETF world. Liquidity is an excellent indicator of viability in the ETF industry, but there is not a particular formula that dictates if, or how long, a fund will last if investor interest is lacking or waning. The closing of the 19 PowerShares funds this month provides an opportunity to sort through some of the ETF clutter and examine what can go wrong and why.

The incredible popularity of ETFs from 2007 to mid-2008 brought with it an onslaught of new, and often similarly themed, products to market. The unique way in which ETFs are launched has provided sponsors such as PowerShares and Claymore with the opportunity to launch multiple products at a time. This flood, however, has proved to be unsustainable, leading to multiple ETF closings across the industry. Despite the recent hit, PowerShares still remains a significant player in the ETF business, with a product line of 135 ETFs with assets of $25.8 billion as of March 31.

Invesco PowerShares announced on Friday that it plans to close 19 of its ETFs. The affected funds represent less than 1% of Invesco PowerShares’ total assets.

This type of action isn’t new to the ETF world as Claymore closed 11 ETFs last year representing less than 4% of their collective assets. Every ETF that comes to market, although well thought out, doesn’t always get traction. At one point the economics of keeping smaller funds open no longer makes sense.

Invesco PowerShares Friday (5/1/09) announced plans to close and liquidate 19 ETFs. The last day of trading for the affected products (listed below) will be May 18, with liquidation and distribution amounts determined by the May 22 value.

The FAQ (.pdf) has some additional information about the closing. PowerShares warns that starting in early May, the closure process “will cause each fund’s holdings to deviate from the securities included in its underlying index and each fund to increase its cash holdings, which may lead to increased tracking error.” Therefore, I advise all shareholders to sell their holdings as soon as possible, and use a limit order when doing so.

By Jim Wiandt

Can I take a moment to be indignant, to be infuriated at where we find ourselves?

The number of ETFs on Deathwatch continues to grow as we enter 2009. My current list contains 139 names: 97 ETFs and 42 ETNs. The list includes any ETF/ETN that is at least six months old and had an Average Daily Value Traded of less than $100,000 in December.

Exchange Trade Notes are suffering from concerns of default risk. The Lehman Brothers (LEHMQ.PK) bankruptcy, which resulted in the demise of three ETNs, is causing investors to hesitate before throwing money into these products. Unless ETN sponsors to take steps to calm investor fears, their representation on the list is likely to grow in the coming months.

Recently, I published an ETF performance map on a year to date basis. Numbers were hovering around -50% for European ETFs and -60% for Asian ETFs, except Japan. I think it will be interesting to see which markets benefit from last week's rally the most.

click to enlarge

A major laggard is South Korea (EWY) with -69% followed by China (FXI), (PGJ), (GXC) India (INP) and Asia Pacific (PUA) with more than 60% down. As you can see, the picture here is even worse than in Europe and it is broad based.

Among "leaders" mostly Japanese exchange traded funds are listed. Japan High Yield Equity (DNL) -25%, Japan small cap dividend ETF (DFJ) -33%, Japan small cap index ETF (SCJ) -35%. Here we can see an offsetting equity downturn with the Japanese Yen strengthening.

The headline of the day, without a doubt, is at Bloomberg News:

Pakistani Investors Stone Karachi Exchange as Stocks Plunge

Pakistan is busily putting down riots at its stock exchange. After leading the world over the past decade, soaring by almost a factor of 10, it has dropped 35% since April, and traded down 15 of the last 18 days.

At present I own a position in the Japan Smaller Capitalization Fund (JOF).  One of the things that I talk less about in my investing, is my willingness to allow some professionals closer to the situation manage a small amount of the assets, if they have a good track record, and the area of the global markets is deeply out of favor.  When I do this, it is typically for just one investment, and not more than 5% of the total portfolio.

Japanese small caps?  Definitely out of favor.  When I look at the top ten holdings of the Japan Smaller Capitalization Fund, I can justify holding them on a book value basis, and on an earnings basis, relative to the low interest rates in Japan, they make sense as well.

Five new international ETFs have hit the market. The new PowerShares FTSE RAFI ETFs began trading today on the Amex along with the international private equity ETF the firm filed for earlier this year.

Three of the funds based on RAFI indexes cover the small/midsize market segments of global regions. They include the PowerShares FTSE RAFI Asia-Pacific Ex-Japan Small-Mid Portfolio (PDQ), the PowerShares FTSE RAFI Developed Markets ex-U.S. Small-Mid Portfolio (PDN) and the PowerShares FTSE RAFI Europe Small-Mid Portfolio (PWD). The small and midsize segments of international markets are becoming popular areas of investment for purposes of international diversification now that international large-cap markets are correlating more closely with U.S. large-cap stocks. The three funds complement existing PowerShares ETFs covering the large-cap segments of those same three regional markets. PWD and PDN have expense ratios of 0.75%, while PDQ's is 0.80%. Options contracts will be available for all three funds.

PowerShares is adding to its lineup of international exchange-traded funds with five new offerings that it expects to launch on the American Stock Exchange [AMEX] on September 27.

Four of the five will track fundamentally weighted indexes developed jointly by FTSE and Research Affiliates. These FTSE RAFI indexes use four fundamental factors—book value, sales, cash flow and dividends—rather than market capitalization to weight the stocks in the index. The designers claim this strategy helps their indexes outperform over the long haul by avoiding market bubbles and not overweighting overvalued stocks.

All-World, and All-World Ex-US
iShares MSCI ACWI (All Country World Index) Index Fund ETF (ACWI)
SPDR MSCI ACWI ex-US ETF (CWI)
SPDR S&P International Small Cap ETF (GWX)
The SPDR S&P World ex-US ETF (GWL)
Vanguard All-World Ex-US ETF (VEU)
NETS FTSE CNBC Global 300 Index Fund (MYG)