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Barclays ETNs Crowd Path Of The Walking Dead

Drew Voros

There’s a lot written about the biggest ETFs, about the amount of new assets they are attracting, about how big a market share they consume and about how they revolutionized investing.

All the top ETFs measured by assets under management are excellent products that trade like water and are popular because they deliver what they say they will, which is usually plain-vanilla, broad market equity exposure at a dirt cheap price—you know, ETFs like the $237 billion SPDR S&P 500 ETF Trust (SPY), the $102 billion iShares Core S&P 500 ETF (IVV), the $76 billion Vanguard Total Stock Market Index Fund (VTI) and so on.

But if you flip the list and take a look at the ETFs with the least amount of assets, it’s a different story. And it’s one that’s interesting from an issuer perspective, but it’s also a cautionary tale for investors.

Here are the 10 ETFs/ETNs with the lowest amount of assets—think of them as the opposite end of the spectrum from ETFs we just talked about that have assets of $200 billion, $100 billion and $76 billion in assets. Note that seven of the 10 products are ETNs from Barclays, under the iPath brand.

10 ETFs With Least Amount Of Assets

Ticker Fund AUM ($K) Expense Ratio (%) Spread (%) Launch Date
XXV iPath Inverse S&P 500 VIX Short-Term Futures ETN 431 0.89 0.93 7/16/2010
HEVY iPath Pure Beta Industrial Metals ETN  522 0.85 0.54 4/20/2011
IVOP iPath Inverse S&P 500 VIX Short Term Futures ETN II  550 0.89 1.60 9/16/2011
ADZ DB Agriculture Short ETN  555 0.75 2.04 4/14/2008
LEDD iPath Pure Beta Lead ETN  602 0.85 0.94 4/20/2011
SBV iPath Pure Beta S&P GSCI-Weighted ETN  627 0.85 0.39 4/20/2011
GRWN iPath Pure Beta Softs ETN  632 0.85 0.27 4/20/2011
FOIL iPath Pure Beta Aluminum ETN  632 0.85 0.66 4/20/2011
SOP ProShares UltraShort Oil & Gas Exploration & Production  647 0.95 0.77 6/23/2015
AGA DB Agriculture Double Short ETN  653 0.75 0.74 4/14/2008


Little Funds, Big Spreads

The IPath Inverse S&P 500 VIX Short-Term Futures ETN (XXV) has $431,000 in assets, the smallest of any U.S.-listed exchange-traded product. At No. 10 is the DB Agriculture Double Short ETN (AGA), with $653,000 in AUM.

XVV has an expense ratio of 0.89% and an average trading spread of 0.93%, costing investors nearly 2% just to get into the fund. And good luck getting out. AGA is a bit better, with a 0.75% expense ratio and an average spread of 0.74%. But still, ouch.

Of course, the wide spreads are a symptom of the pittance in assets. Market makers are not going to lose money selling these funds to you, they will get their arbitrage. The funds in between all have the same affliction—high expense ratios, because they are niche products; and wide spreads, because they don’t trade much.

The iPath Inverse S&P 500 VIX Short-Term Futures ETN II (IVOP) serves up an expense ratio of 0.89% and average trading spreads of 1.60%. That’s almost 2.5% before it lands in your brokerage account.


Why Do These Exist?

For ETF industry observers, it begs the question: Why do these exist? The answer turns out to be simpler than you might expect. Again, notice that seven of these ETPs at the bottom are exchange-traded notes, all from Barclays.

Last year, we saw a list of 128 ETF/ETN closures, and nearly all—if not all—had more assets than the 10 listed above. So why are these zombie products—wasting away in assets while offering up trading surprises because they are so illiquid they sweat sand—still walking through exchanges?

“We believe ETNs can survive longer in the market with limited assets, as they do not license an underlying index the way many ETFs do,” said Todd Rosenbluth, director of ETF and mutual fund research at CFRA, an independent research firm. “While Barclays’ priorities likely focus on other businesses, we think they are not regularly reviewing their product lineup the way iShares or SSgA does.”

‘Dirt Cheap To Actually Run’

“The way to think about ETNs from an issuer perspective is all about the cost to them,” said Elisabeth Kashner, director of ETF research at FactSet. “In most cases, ETNs are dirt cheap to actually run, as there are no portfolio managers to pay. All they have to do is be willing to bear the risk of meeting a potentially unpredictable payout. In general, banks issuing ETNs hedge this risk internally, as part of their overall risk management operation.”

According to Kashner, these ETNs “are all extremely easy to hedge in the futures market, with the exception of SOP [ProShares UltraShort Oil & Gas Exploration & Production]. The total exposures are so tiny that the day-to-day risk amounts to a rounding error on the risk desk’s book. “

Of course, Barclays is one of the world’s largest and oldest banks, and so be it if they want to maintain “dead ETNs walking.”


Land Mines For Investors

The bigger issue is that these funds could lure in unsuspecting and naive investors who do not know what they are getting into, and they get broadsided with big trading spreads getting in and out of the funds, on top of the pricey expense ratio and potential for depreciation.

But I am a believer in “buyer beware,” and some of these funds do offer unique exposures.

The iPath Pure Beta Aluminum ETN (FOIL) (0.85% expense ratio, 0.66% spread) tracks an index of a single aluminum futures contract whose expiration date is chosen to mitigate contango. While Alcoa would seemingly be a better proxy bet on aluminum, it is not crazy to think that this fund offers an investor a purer play on the commodity, despite the costs and wide spreads—no corporate concerns with the commodity futures contract.

Barclays declined to comment, and it is certainly debatable whether issuers should allow these zombie ETFs to roam markets, offering potentially frightful trading experiences. Out of the 20 exchange-traded products with the fewest assets, 14 are from Barclays, so the firm is clearly in no hurry to shutter any ETNs.

That’s the company’s prerogative, just like it is the investor’s responsibility to understand not just the product they are buying, but what dangers lurk beyond the investment thesis.

At the time of writing, the author held none of the funds mentioned. Drew Voros can be reached at dvoros@etf.com.


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