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3 ‘Walking Dead’ Smart Beta ETFs

Cinthia Murphy

Smart-beta ETFs may be wildly popular with investors these days, but there are several such funds that aren't gathering any assets, and are, in fact, facing high closure risk.

We went looking for the "walking dead" among the thriving smart-beta segment. Here's what we found:

Defining The Universe

There are 460 smart-beta exchange-traded products in the market today. We started there, and narrowed it down to those that launched prior to 2012. The goal was to focus on funds that have had plenty of time to gather assets and gain traction.

That yielded some 270 strategies, out of which more than 40—or roughly 16 percent of them—showed serious risk of shuttering for lack of assets despite having been around for years, and being part of one of the most popular spaces in the ETF industry today.

To narrow the list one step further, we excluded exchange-traded notes, and honed in on ETFs alone. Of the funds that launched between 2000 and end-of-year 2011, 15 smart-beta ETFs are at serious risk of closing for lack of assets. Three of these funds stand out because they have essentially faced net redemptions every year since 2012, according to ETF.com data.

They are:

RevenueShares Navellier Overall A-100 (RWV | F-59), total AUM: $7.7 million gathered in about 6 ½ years.

RWV is a U.S. total market equity fund. It tracks an index that uses factors such as fundamentals and momentum to pick 100 U.S.-listed stocks, which are then revenue-weighted.

To quote ETF.com Analytics, "The investment principle behind this hodgepodge is unclear, but there's no doubt that the fund's processes take it very far away from plain-vanilla coverage. Interest is very slim: Assets are minimal and trading volume is almost nil."

Indeed, RWV trades on average only $28,430 a day, according to ETF.com data. The fund also isn't cheap to own. It carries a 0.6 percent expense ratio, and it has an average trading spread of 0.2 percent, putting total cost of ownership around $80 per $10,000 invested.

Since it came to market, it has gathered only $7.7 million in total assets. In the last 3 ½ years, RWV has faced net redemptions of some $4 million, ending each calendar year as a net asset loser even though its performance has been impressive in that period. As the chart below shows, RWV's trajectory is up, and it has been steadily up for a while: 

 

 

 

PowerShares SandP International Developed High Quality (IDHQ | D-66), total AUM $17.7 million gathered in eight years.

IDHQ is a developed ex-U.S. equity fund. It tracks an index of stocks selected based on their long-term growth prospects and stability as well as earnings. The strategy, which first launched in June 2007, has already undergone two makeovers in an attempt to attract investor dollars, but to no avail so far.

In March 2012, IDHQ changed its name and index, opting for a benchmark that relies on fundamental screens to find outperforming stocks. Eight months later, PowerShares slashed the fund's fee by about 40 percent, to 45 bps from 75 bps.

Still, investor interest is amiss. IDHQ has gathered only $17.7 million in total assets in the eight years it's been on the market. Its trading record isn't impressive either. It has average trading volume of only $68,320 a day, and average trading spreads of 1.1 percent. In other words, investors are shelling out upward of 150 bps to own this fund.

In the past 3 ½ years, IDHQ has been consistently bleeding assets even as it delivered positive performance, seen in the chart below:

 

 

WisdomTree Commodity Country Equity (CCXE | C-25), total AUM: $11.5 million in about 8 ½ years.

CCXE is a global ex-U.S. equity fund that focuses on dividend-paying stocks from commodity-exporting countries. It tracks a fundamentally weighted index that assigns equal weights to allocations to Australia, Brazil, Canada, Chile, New Zealand, Norway, Russia and South Africa.

The fund delivers when it comes to dividends: It's shelling out some 4 percent in portfolio yield before expenses. But that's the extent of the good news. These are tough times for commodities and commodity-producers, so performance hasn't always been that good, as the chart below shows.

CCXE also isn't cheap to own, with an expense ratio of 58 bps and a whopping trading spread averaging 1.21 percent. That translates into a cost-to-hold of roughly 180 bps, or $180 per $10,000 invested.

Since it came to market in October 2006, the fund has gathered only $11.5 million in total assets, and its slender asset base raises closure concerns. Between January 2012 and May 2015, it has bled assets every year, facing net redemptions totaling $19.7 million in that period. 

 

Charts courtesy of StockCharts.com

 

 

Beyond these three funds, we offer here a list of the smart-beta ETFs launched prior to 2012 that are struggling to gather assets and face high closure risk. 

Veteran Smart-Beta ETFs Facing High Closure Risk

 
ETF
 
 
Ticker
 
Asset Flow
Jan 2012-
June 2015
 
Total AUM
($M)
 
RevenueShares Navellier Overall A-100 RWV -4 7.7
PowerShares SandP International Developed High Quality IDHQ -6.7 17.7
WisdomTree Commodity Country Equity CCXE -19.7 11.5
First Trust Total US Market AlphaDEX TUSA -2.6 5.4
Market Vectors Gulf States MES -1.3 16.6
PowerShares KBW Property and Casualty Insurance KBWP 4 13.2
First Trust Brazil AlphaDex FBZ -1.7 2.8
First Trust Latin America AlphaDex FLN 8.5 8.2
First Trust South Korea AlphaDex FKO 1.4 2.6
First Trust Mega Cap AlphaDex FMK 9.1 17.8
iShares Global Inflation-Linked Bond GTIP 6.3 19.3
WisdomTree Global Natural Resources GNAT -1.5 21.5
EGShares EM Quality Dividend HILO 24.2 24.1
PowerShares KBW Insurance KBWI -18 7.2
PowerShares KBW Capital Markets KBWC -2.5 5.8

Source: ETF.com data

 

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