A recent story by Alternative Insights Editor Brad Zigler highlights commodities as a portfolio allocation, and if you considered any commodity-based products in recent months, you may like the prices more now. All the products mentioned in Zigler’s research are healthy and soundly meeting their purposes, but many other commodity funds populate this month’s ETF Liquidation Watch list, compiled by ETF Global.
All the funds mentioned in Alternative Insights have been around longer than two years, and many of them have negative trailing 12-months performance, meeting the first two criteria to land on ETF Global’s watch list. But since they are all well above the $5 million assets under management threshold, they don’t meet the third criteria. That said, the three criteria apply to the 26 commodity funds on this month’s list, which are not exclusively long-only. For example, the Powershares DB Agriculture Double Short ETN (AGA) is exposed to the grains that have rallied, but it is also one of the funds mentioned last month that had to suspend creation units. The fund now trades below net asset value (NAV), as its assets have fallen below $4 million.
All told, this month’s Watch List, available at www.etfg.com or by clicking here, has 73 names, which is higher than recent months. ETFs are capturing greater fund flows, but they are increasingly going to the sector leaders as the industry consolidates.
Thirty-four of the 73 funds are ETNs, mostly commodity funds that use either futures or swaps to meet their objectives. Futures-based funds face risks involving how backwardation or contango affects tracking error versus their spot markets at the time of liquidation. Products based on swaps are even more difficult to assess as the opaque contracts do not reveal their terms. For many reasons, it is a good idea to stick with vibrant products that can withstand the volatility that most commodities have seen lately.
While not many long equity funds were down for the past year, some basic materials and emerging market sector funds had negative trailing 12-month performance, which pulled their AUM values down below $5 million. Twenty of the 28 equity funds on the list are inverse products, and many are close to or even below $1 million in AUM, which won’t provide much to the sponsors who typically charge less than 1 percent in expenses.
The four fixed income and seven currency funds tend to have even lower expense ratios, and the eight multi-asset products vary more widely. Their small size and negative performance casts doubt on the longevity of these products that have already had two years to prove themselves.
The ETF industry has done a masterful job of bringing innovative products to market, but advisors need to be aware of the added risks in the more esoteric ones.