Don't Let Zombie-filled ETFs Ruin Your Retirement Portfolio

Retirement Daily Guest Contributor

By Dan Weiskopf

The implications of ETF Hertz exposure are transparent and impactful, including:

· The speed with which Hertz’s stock crashed highlights the need to know the process by which an ETF rebalances, its exposure to companies, or “zombie” industries

· The Fed’s liquidity pump creates dilution and headwinds on earnings per share but is arguably clearly better than the alternative

· A quick screen of which large ETFs have high zombie exposure

As of June 12, 2020, there are or were 5.1 million Hertz shares ($HTZ) owned by ETFs. The SPDR Transportation ETF ($XTN) has the greatest exposure at about 90 bps and small-cap ETFs, like $IWN, $VB, $VBR, $VTI and $SCHA, own millions of shares. While this specific ownership may not impact these ETFs in a big way, their ownership highlights the debate between passive and active. Meaning, why should an ETF own it at all and how or when does the rebalance process take place – monthly, quarterly or annually? Yes, I said “annually” – there are some ETFs that actually only rebalance once a year.

(To find out more about the details of Hertz ownership checkout the ETF Think Tank Tools and learn how these kinds of issues can be measured using the Smart Cost™ calculator.)

What the Fed is doing in its efforts to support market liquidity and investor confidence is keeping the window open for companies and “zombie” industries to raise needed capital to bridge the probable economic recovery.

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Zombie industries, as we in the ETF Think Tank and Toroso define them, are industries whose fundamental business models are in transition under current circumstances and whose balance sheets need some recapitalization. The obvious examples are airlines, real estate and restaurants. Hertz is the opposite of the poster child for how a “safe brand” like $GE can see shareholder value erode slowly when high debt and problems are not addressed quickly. What is a surprise about Hertz, which on February 20, 2020 was trading at about $20.20 a share, is how dramatically the stock collapsed when the world stopped traveling. In hindsight, Hertz filed bankruptcy too quickly. What might have happened if Hertz had completed a spot secondary during this period at $10 a share pre-bankruptcy?

Hertz filed for bankruptcy on May 22, 2020, but traded millions of dollars each day between February and that date. This may be the solution that is taking place in the airline industry. According to a Bloomberg article, it seems that American Airlines and United Airlines are in the process of raising billions of dollars (American Air Braces Balance Sheet with $3.5 Billions of Dollars in Financing). Of course, every crisis has symbolic corporate victims – in 2008 it was the banks and Lehman Brothers and Bear Stearns.

The Fast Crash by Hertz - Watch out for Zombies

What is important about the speed with which the Hertz collapse occurred is the fact that many ETFs focused on value currently have high exposure (above 10%) to the zombie industries, and as passive solutions do not have a next generation or adaptive approach to the quality of the balance sheet or cash flow. Examples of zombie industries as we define them include airlines and retail, energy and leisure, gambling and real estate. A full list can be provided upon request.

The problem is that large funds with billions of assets under management are attracting flows. Low fees are great, but arguably many such funds are loaded with zombies and their indexes are not robust enough to adapt to the changing circumstances embedded in the markets. We are concerned that retail is being drawn into the market under the safety net of past performance from firms like Vanguard and Blackrock-iShares offering low or cheap access to beta. The Robinhood platform may highlight how some are speculating in this market, but the larger issue may be where hundreds of billions of investor dollars are complacently tucked away based upon a false sense of long-term confidence.

To be clear, zombie equity capital raises are essential to support the economy and such infusions of capital are accretive. Assuming capital is readily available and businesses are strengthened by the Fed lifeline, shareholders should capitalize on the benefits of the system. Our warning is simple. If an index is 10% weighted towards zombies its ability to show per-share earnings growth will also be diluted by more share issuance.

For example, the airlines, which are in the process of raising some $50 billion in liquidity to get through the next 12 to 18 months, will survive, but clearly under a different capitalization structure. Using the ETF Think Tank internal database, I have highlighted the largest ETFs in terms of AUM with the greatest zombie exposure. The year-to-date numbers are as of June 26th, 2020 and clearly point to high zombie scores leading to weaker stock performance, at least versus the S&P 500 Index. In the largest ETFs examples of this can be found in ETFS with the symbols IJR, VNQ, IWM, VB and IWR. A pattern seems to exist that there are more Zombies in small and mid-cap ETFs.

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An additional list of ETFs with even higher exposure to Zombie can be found below. This list was screened for high Zombie exposure in broad ETFs and further provides evidence of a correlation between negative performance and high Zombie exposure. Of course, Zombies can be great for trading and investors have different risk profiles so please consult your advisor.

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The liquidity provided by the Federal Reserve hopefully will provide an opportunity for public companies to gain funding to address the vulnerability of their business and excess leverage, but investors need to recognize their personal exposure to these zombie industries. Hertz, as a brand and a business, personifies the speed with which an over-leveraged company can fall apart and highlights the fact that circumstances exist within many ETFs that are overexposed to the necessary dilution effect on investors. Transparency is an important benefit of the ETF wrapper because it enables investors to know what they own. Why not take advantage of it? Structure matters!

About the author – Dan Weiskopf

Dan Weiskopf is a member of the Investment Committee at Toroso Asset Management and the ETF Strategist for the ETF Think Tank. Dan Weiskopf has over 30 years of buy-side experience and has been focused on ETFs for about 20 years. Prior to joining Toroso he managed portfolios under the name Access ETF Solutions (2013-2018) and Global ETF Strategies (2008-2013). Prior to focusing on ETFs he founded MH CApital Partners (1995-2003), a long-short small-cap hedge fund and worked at American Diversified Enterprises, a family office, affiliated with Allen & Company. Fiduciaries and financial professionals can sign up for the Tank at or reach out directly to Dan Weiskopf at

It is important that all readers review the below disclosure and manage their own risk. These comments should not be considered investment advice. Critical disclosure link:


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