NEW YORK (TheStreet) - Dozens of new ETFs have appeared lately, but not all of them will survive, says Ron Rowland, president of Capital Cities Asset Management, a financial advisor in Austin, Texas. Funds that fail to attract sizable assets are unprofitable to operate, and they could be shut down.
To alert investors about unprofitable funds, Rowland publishes a list that he calls "ETF Deathwatch," which appears on investwithanedge.com. The list includes funds that have had less than $5 million in assets for the past three months or average daily trading volume of less than $100,000.
This month the list features 143 funds, including iShares MSCI Emerging Markets Materials (EMMT), which has $9.9 million in assets; PowerShares Dynamic Financials (PFI), with $19 million; and ProShares UltraShort Healthcare (RXD), with $4.4 million.
Rowland says that investors should avoid funds with limited assets and negligible trading volume. When a fund shuts down, shareholders will be forced to spend time and money to find a replacement. Sometimes shareholders who stick around to the end can be stuck covering the costs of liquidation, which can total more than 3% of assets.Even when they survive, small funds can be poor choices because of high trading costs. Consider ELEMENTS CS Global Warming (GWO), an exchange-traded note (ETN) which has $3.5 million in assets. To calculate total trading costs, you should include brokerage commissions and the bid-ask spread, the difference between what buyers want to pay and sellers will accept. The bid of ELEMENTS was recently $7.10, while the ask was $7.88. To make a purchase, a trader would have to pay the higher price. To sell, investors may have to accept the lower price. So trading the ETN is not cheap. Total transaction costs could cost a buyer more than 11%. To hold down trading costs, Rowland buys only funds among the 20% with the greatest trading volumes. These funds trade shares worth millions of dollars a day, and the bid-ask spreads are tiny. When he wanted to buy a mid-cap blend fund recently, Rowland started by screening through the 15 available choices. He eliminated two-thirds because their trading volumes were too low. A finalist on his list was iShares Russell MidCap Index (IWR), which has $6.2 billion in assets and a minuscule bid-ask spread of 0.03%. But he elected to buy iShares S&P Midcap 400 (IJH), which has $9.5 billion in assets and a bid-ask spread of 0.02%.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
24/7 market commentary from Jim Cramer and 20+ veteran Wall Street gurus. Get access to the latest trading ideas on stocks, options, and ETFs as well as a real-time forum to see the pros exchanging their investment ideas.
- Jim Cramer + 20 Wall Street pros
- Intraday commentary & news
- Real-time trading forum
- Actionable trade ideas
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV