TAG | ETF liquidations
In an article from Forbes.com, May 27, 2011, Zack O’Malley Greenburg writes that a little over a year ago, fund provider Direxion launched an ETF (Exhange Traded Fund) called the Daily Semiconductor Bull 3x Shares. Its aim was to triple the performance of the PHLX Semiconductor Sector Index. Not as simple a task as it seems, apparently: Over the next seven months the index rose 5%, while the Direxion fund returned -6.25%.
Maybe investors should have heeded Direxion’s own disclaimer: “There is no guarantee the fund will meet its stated investment objective.”
This is the way of things in the world of ETFs, writes Greenburg, where offerings have exploded in recent years. Nearly 900 ETFs have been launched over the past five years, leading to a preponderance of funds that straddle the line from obscure to downright bizarre. Among them are leveraged ETFs like the aforementioned semiconductor fund that seek to double or triple the performance of sectors–and don’t always succeed. Examples range from the ProShares Ultra KBW Regional Banking ETF, to the Direxion Daily Agribusiness Bear 3x Shares ETF, which trades under ticker symbol COWS. There is also a smattering of international offerings, which comprised half of all new S&P-based index funds launched last year. Market Vectors parent Van Eck recently announced plans to launch a Mongolia ETF.
Forbes.com writes that there are a few ETFs so outrageous that they’ve already been shut down–for example, the HealthShares Dermatology and Wound Care ETF, shuttered in 2008 due to lack of demand. Others, like the PowerShares Dynamic Brand Name Products Portfolio and the PowerShares Autonomic Allocation Research Affiliates Portfolio, never even made it past the planning stages.
We are reminded that many obscure ETFs like Direxion’s leveraged semiconductor fund can be hazardous to investors who aren’t careful. These leveraged funds are designed for day-traders and backed by derivatives. Though providers warn that these funds are not meant to be held as long-term assets, many investors miss the fine print.
The Forbes.com article says that the SEC launched a review of all funds last March, deferring applications for “actively managed and leveraged ETFs that particularly rely on swaps and other derivative instruments to achieve their investment objectives” in the meantime. There has been a lot of concern generally about derivatives in the last few years, and specifically in our division about the use of derivatives by investment companies, including ETFs,” says Elizabeth Osterman, head of the exemptive applications office of SEC’s Division of Investment Management. “Our decision to defer the review of exemptive applications for derivatives-based ETFs reflects concerns about whether granting exemptive relief for those funds would be consistent with required regulatory standards in light of those concerns.”
Greenburg goes on to say that the SEC hasn’t yet resumed allowing providers to launch new leveraged ETFs, but it hasn’t banned existing products or disallowed existing issuers from creating new ones. The three leading providers of such funds–Direxion, Rydex and ProShares–now have something of a lock on leveraged ETFs. And no matter how outlandish their products may sound, they continue to be popular.
If you have invested in an ETFs and lost your investment, you may have valuable legal rights to be compensated for your losses. Call a Securities Arbitration Lawyer at Soreide Law Group for a free consultation on how to potentially recover your losses. To speak with an attorney, call 888-760-6552, or visit www.stockmarketlawsuit.com.
Soreide Law Group, PLLC., representing investors nationwide before FINRA the Financial Industry Regulatory Authority.
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In an article in InvestmentNews.com, Jessica Toonkal writes that with fund firms launching a seemingly endless parade of exchange-traded funds, a dark side to this glut of offerings is emerging. Portfolio liquidations, once rare, are becoming increasingly commonplace. This recent trend is scaring advisers. Indeed, some said they are more than a little worried about getting stuck in an ETF that ends up being shut down.
“With the proliferation of ETFs, this is becoming a greater concern,” said Sailesh S. Radha, a vice president at CCM Investment Advisers LLC, a registered investment advisory firm that manages $2.5 billion in assets. “Telling an investor than an ETF is shutting down is not news you want to give them.” said.
So how can an adviser spot trouble before it strikes? Here are a few warning signs to look for:
Has your ETF been around too long?
It is important to pay attention to how long an ETF has been around. You need to pay attention to how long an ETF has been on the market. “No one launches ETFs, then closes them a couple months later, except for Northern Trust [Corp.],” Mr. Hougan said, taking a jab at the Chicago-based firm, which closed 17 ETFs last February only 11 months after launching them.
We are reminded that an ETF that has has less than $10 million in assets – and has been around for a couple of years or so – should raise a red flag for advisers. It’s clearly not gaining traction with advisers.
Advisers also should pay attention to how an ETF is trading and if the fund is best-in-class, said Matt Hougan, president of ETF analytics at IndexUniverse. An ETF’s assets may be puny, but if it’s one of the few funds in an asset class that is poised to take off, it may stick around longer, he explained.
How are the other ETFs doing in the firm?
The article goes on to remind us that advisers also should take note of the investment adviser for the funds. If the firm manages a large number of profitable funds, it could buy additional time for laggards, said one executive at an ETF company, who asked not to be identified. “As long as you have a few ETFs that are the money makers, you can afford to have a few that take longer to gain assets,” the exec said.
If you have invested in ETFs and lost money, you may have valuable legal rights to be compensated for your losses. Call a Securities arbitration lawyer for a free consultation on how to recover your losses. To speak with an attorney, call 888-760-6552, or visit www.stockmarketlawsuit.com. Soreide Law Group, PLLC., representing investors nationwide before FINRA the Financial Industry Regulatory Authority.
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