Leveraged S&P 500 ETN (BXDD) To Shut Down

by on May 4, 2011 | Updated May 12, 2011 | ETFs Mentioned:

It took more than four months to arrive, but the first ETP closure of 2011 is finally here. The Barclays ETN+ Short D linked to the S&P 500 Total Return Index (BXDD) have been called for redemption after the indicative value fell to a price point that triggers such a move.

Barclays rolled out its suite of ETN+ products in late 2009, at a time when some investors had expressed frustration over the performance of leveraged products that feature a daily reset of exposure. Rather than reset exposure on a daily basis, the suite of ETNs sought to deliver leveraged results over the term of the debt securities. BXDD offers inverse exposure to the S&P 500 Total Return Index, with an initial participation value of 3.0x. Like all of the ETN+ products (including BXUB, BXUC, BXDB, and BXDC), BXDD featured a stop loss trigger at $10. So when the per share price declined to that level, it triggered an automatic redemption from Barclays:

It’s interesting to note that although BXDD fell to $10 on April 28–thereby triggering the automatic repurchase by Barclays at $10 per share–shares of the ETN have traded slightly above that level in recent days. BXDD closed at $10.01 on Friday and at $10.03 on Monday, suggesting that some investors weren’t fully aware of the pending redemption [How To Deal With ETF Closures].

According to Ron Rowland, BXDD is the first ETP closure of 2011, the 14th ETN to delist, and the 174th exchange-traded product to close its doors.

Wave Of Closures?

Given the increasingly top-heavy nature of the ETF industry, many had expected the pace of ETF closures to accelerate in 2011. In 2008, 58 ETPs shut down, followed by another 56 closure in 2009 and 49 in 2010. But with more than four months in the books, BXDD is the first exchange-traded product to call it quits in 2011. At the start of the year, there were more than 450 ETPs with less than $50 million in assets and more than 350 with less than $25 million. But ETF issuers have become more hesitant to pull the plug on ETFs that are slow to gather assets, perhaps noting the explosive growth experienced by funds that got off to a slow start. The Global X Colombia ETF (GXG) is perhaps the best example of that phenomenon. GXG debuted in February 2009, and at the end of March 2010 had only about $10 million in AUM. Then the Colombian economy began to expand at a blistering pace, and GXG finished 2010 with about $170 million in assets [see Where Are All The ETF Closures?].

Improvements in overall profitability may also account for the small number of ETF closures. Though there are hundreds of funds that are losing money for the firms that offer them, increases in ETF assets have translated into higher revenues and greater financial flexibility for ETF issuers.

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Disclosure: No positions at time of writing.