ETF Hall Of Shame: Nine Exchange-Traded Debacles
Over the past several years, exchange-traded funds have enjoyed a tremendous surge in popularity, passing many major milestones as they were embraced by retail and institutional investors alike. Once comprised solely of “plain vanilla” products tracking well-known equity indexes, the ETF industry has evolved at an incredible pace in recent years, and now offers investors exposure to nearly every corner of the investable market. Along the way, we’ve seen brilliant innovations (such as leveraged ETFs, “intelligent” ETFs, and actively-managed ETFs, just to name a few) and a plethora of new fund launches. But it hasn’t been all sunshine and rainbows; there have been a number of missteps along the way as issuers aggressively launched and promoted funds for which the market had no appetite.
With ETF issuers pitching so many new products to investors, it is a virtual certainty that some of the offerings will strike out due to lack of interest, a poorly-devised distribution plans, or numerous other reasons. As the number of new fund launches has spiked, so has the frequency of fund closures. While the end result is all the same, some of these have been more spectacular failures than others. A look at some of the biggest ETF blunders of all time, in no particular order:
1. HealthShares (March 2007 – December 2008)
Obituary: Perhaps spurred by heightened investor interest in the biotech & healthcare sector, XShares launched a line of ETFs focusing on very specific niches of the health care industry (e.g., HealthShares Metabolic-Endocrine Disorders, HealthShares Orthopedic Repair, and HealthShares Autoimmune-Inflammation, etc.). But the funds never really took off, done in by plummeting equity markets and perhaps lack of interest in hyper-targeted ETFs. “We still believe our structure was right,” said XShares President Jeff Feldman in August 2008 as the company announced that 15 of the 19 funds were flat lining. “And our timing was bad. So we decided to shutter some of them.”
Post Mortem: After revising four of its ETFs in August 2008 (HealthShares Cancer, HealthShares European Drugs, HealthShares Diagnostics, and HealthShares Enabling Technologies), XShares finally pulled the plug on the HealthShares experiment in December of that year. But the company is still a major player in the ETF industry, offering a line of five target retirement date ETFs with a combined market capitalization of about $150 million. XShares recently announced the closure of its AirShares EU Carbon Allowances ETF (ASO).
2. Bear Stearns Actively-Managed ETF (March 2008 – October 2008)
Obituary: As Bear Stearns was collapsing under the weight of the sub-prime mortgage crisis, the company was also making history by launching the first actively-managed ETF. Although the Bear Stearns Current Yield Fund (YYY) was a pioneer in what is now a rapidly-developing space, the fund was doomed for failure from its first trade.
To say YYY was done in by poor timing is like saying the Titanic sprung a leak. YYY launched in March 2008, just days after the Fed and JP Morgan had agreed to provide an emergency loan to keep Bear afloat. Lost in the commotion over the subsequent $2 per share takeover offer from JP Morgan was the fact that history had been made with the launch of YYY, which allowed its portfolio manager discretion in seeking to achieve its investment goals.
Shortly after the launch of YYY, PowerShares debuted its Active Low Duration Fund (PLK), another actively-managed fund investing in primarily short-term government securities. Battered by PowerShares’ impressive marketing campaign and widespread media coverage, as well as the stigma that came with the Bear Stearns name, YYY never really got off the ground. The fund closed for good in October 2008.
Post Mortem: Although neither Bear Stearns nor JP Morgan has made much of a splash in the ETF industry since YYY, the fund holds an interesting place in history. PowerShares and Grail Advisors have both been hailed as pioneers of actively-managed ETFs (PowerShares launched its first actively-managed funds more than a year ahead of Grail, but doesn’t allow “manager discretion” as does GVT). But neither really has true claim to the title, crossing the line behind a crashing-and-burning Bear Stearns.
3. NETS ETFs (April 2008 – February 2009)
Obituary: Northern Trust’s stint in the ETF business was a short one. In early 2009 the Chicago-based investment management firm announced its intentions to exit the ETF business, closing down its line of Northern Exchange Traded Shares (NETS). NETS, which had been launched less than a year earlier, consisted of 17 funds with about $33 million in assets at the end of 2008. NETS tracked international, single country benchmarks, including several European and Pacific economies. While several NETS products faced stiff competition (such as the Japan TOPIX Index Fund), others offered unique exposure (such as the Ireland ISEQ 20 Index Fund). In a press release, Northern Trust noted that it “considered current market conditions, the inability of the funds to attract significant market interest since their inception, their future viability as well as prospects for growth in the funds’ assets in the foreseeable future” in its decision to move on.
Post Mortem: Despite its struggles to gain traction in the ETF industry, Northern Trust continues to operate as a well-known and widely-respected manager of passive equity and fixed income index products. Many international equity markets have staged sharp recoveries since Northern Trust pulled out of the business, leading to speculation as to whether the NETS product line should have been given a little more time to prove its viability.
4. MacroShares Oil Up and Oil Down Funds (Early 2007 – June 2008, July 2008 – June 2009)
Obituary: One of the most innovative developments in the ETF industry came in the form of the MacroShares Oil Up Trust (UCR) and Oil Down Trust (DCR). These linked products invested in short-term Treasuries and entered into an agreement to pledge assets to each other based on changes in an underlying benchmark (in this case, crude oil prices). As oil prices rose, assets moved from DCR to UCR, and vice versa. The funds were tremendously popular with investors, but were forced to shut down much sooner than anticipated when oil prices rose above $120 and triggered a liquidation provision. Since the funds were based on a starting point of $60 per barrel, the down fund was left without any assets as prices skyrocketed.
Post Mortem: Despite the premature closure, MacroShares considered its oil up/down funds to be a huge success (the funds did, after all, track the benchmarks they were designed to and MacroShares did manage to charge an expense ratio of 1.6% on about $300 million of assets). So it was hardly a surprise when MacroShares fired back with a second round of up/down oil funds in 2009. These funds were never in danger of the same fate that claimed their predecessors, but shut down nevertheless after failing to attract a certain level of assets, despite lowering the expense ratio to 0.95% and instituting a “breaking point” of $200 per barrel. MacroShares is now hoping that the third time will be a charm, sponsoring another paired fund offering providing exposure to the residential housing market. The MacroShares Major Metro Housing Up Trust (UMM) and Major Metro Housing Down Trust (DMM) follow rules similar to the initial oil funds, focusing on the Case-Shiller Composite-10 Home Price Index. So far, the housing up/down funds appear to be faring reasonably well.
5. SPA ETFs (October 2007 – March 2009)
Obituary: At a time when seemingly everyone had an “alpha-seeking” ETF that couldn’t help but beat the market, a little-known issuer made a big splash by launching six ETFs that investors couldn’t help but notice. London-based SPA ETF Plc’s line of funds were tied to the MarketGrader family of indexes, which had an impressive history of outperforming widely-followed benchmarks. At a time when most “alpha ETF pioneers” couldn’t offer any sort of track record, SPA boasted three years of stellar returns, and was selected by Barron’s to underlie its “stock-picking” index, the Barron’s 400. As indicated by the dates of birth and death for the SPA line of ETFs, the funds’ lives coincided with the worst recession in a generation, and the SPA ETFs struggled to make the grade. In March 2009, the company announced that it had “determined current market conditions are unsuitable for a long-only equity investment strategy, such as the one employed by the SPA MarketGrader ETFs.”
Post Mortem: Although SPA shuttered all of its existing funds, the company elected to leave the trust open and made strong indications that they would be back with additional ETFs later in 2009. Daniel Freedman, Managing Director of SPA ETFs said “the trust remains open and we plan to partner with other institutions to bring new ETFs to market in Europe and the US in 2009. Additionally, when market conditions improve we may reintroduce the MarketGrader strategy.” Despite a tremendous recovery, all remains quiet from SPA, and the company hasn’t released any news on its web site in nearly a year.
6. Adelante Shares (September 2007 – July 2008)
Obituary: Launched in September 2007 to offer investors exposure to various parts of the U.S. real estate market, the Adelante Shares line of ETFs hardly had a chance of survival. Real estate markets began to crater shortly after the launch of the funds, and the bottom may yet be ahead of us. When the liquidation of the family was announced in June 2008, the largest of the seven funds had about $4.5 million in assets, and none of the other six had more than $2.2 million.
Post Mortem: Shortly following the shuttering of the Adelante Shares line of ETFs, XShares suffered another setback and closed down its HealthShares line of products. But as mentioned above, the issuer’s line of target retirement date ETFs have been a success, going head-to-head with similar offerings from iShares and holding its own against the market leader.
7. AmeriStock ETFs (June 2007 – June 2008)
Obituary: AmeriStock ETFs faced an uphill battle from their inception, competing against much larger Treasury bond ETFs from market leaders iShares and Vanguard. The five Treasury bond ETFs had about $13 million in assets when the liquidation was announced in May 2008. The death of the AmeriStock ETFs marked the first major closure of U.S.-listed bond ETFs, which trailed their equity counterparts to the market.
Post Mortem: AmeriStock may not be a household name to ETF investors, but it is behind two of the largest and most popular oil & gas funds on the market. Victoria Bay Asset Management, the ETF branch of AmeriStock, manages the U.S. Oil Fund (USO) and U.S. Natural Gas Fund (UNG). UNG had inflows of nearly $1.2 billion in July, despite the fact that the SEC delayed approval of new units as the CFTC investigated the role of ETFs in speculative behavior. U.S. Commodity Funds also a gasoline ETF (UGA) and a heating oil fund (UHN).
8. Lehman Opta ETNs (February 2008 – September 2008)
Obituary: In February 2008, Lehman Brothers entered what it hoped would be a rapidly expanding field, launching a trio of exchange-traded noted offering exposure to unique asset classes. The “Opta” line of ETNs included two commodity products (one broad-based note and one agriculture specific fund), as well as the Opta S&P Listed Private Equity Index Net Return ETN (PPE), which tracked an index comprised of 30 companies engaged in private equity investing.
Since ETNs, unlike their ETF cousins, are debt instruments, Lehman’s meltdown posed some interesting problems for ETF investors who had given their assets to the issuer. When a firm that has issued ETNs goes bankrupt, as Lehman did, the notes aren’t worth the paper they’re written on. In October 2008, the Opta products became the first ETNs to close when they were delisted.
Post Mortem: Barclays, which acquired many of Lehman’s assets as the company went under, chose not to take on the obligations of the Opta ETNs. Although Barclays certainly had expertise in the ETN field (the bank pioneered the products and is behind the market-leading iPath product line), the risk of litigation surrounding the Lehman notes far outweighed any fees that might have been earned on such a small pool of assets.
9. FocusShares ETFs (December 2007 – October 2008)
Obituary: In late 2007, FocusShares burst onto the scene with four ETFs tied to indexes from the options focused International Securities Exchange, including:
- FocusShares ISE Homebuilders Index Fund
- FocusShares ISE SINdex Fund (held companies engaged in casinos, liquor, and cigarettes)
- FocusShares ISE-CCM Homeland Security Index Fund (held companies that have contracted work with the Department of Homeland Security
- FocusShares ISE-REVERE Wal-Mart Supplier Index Fund (held companies deriving a large portion of their revenues from Wal-Mart.
Despite some interesting investment concepts, FocusShares struggled to gain any traction among investors. After attracting only about $17 million in inflows during their first nine months, FocusShares executives decided to close the funds and shift its strategy to focus on “solutions-based” ETFs.
Post Mortem: In February 2009, FocusShares plotted a return to the ETF industry, filing for approval on a line of target retirement date funds. But we’re yet to see any developments in this arena, and the company’s web site indicated the issuer is “working towards executing the next phase of its business plan.”
Did we miss a fund or family of funds worthy of inclusion in the ETF Hall of Shame? Let us know your picks in the comments below!
Disclosure: No positions at time of writing.