Why The Fishing ETF Is Green Around The Gills

by on October 24, 2011 | ETFs Mentioned:

As the ETF world has rapidly developed, a number of issuers have begun to explore niche markets with hyper-targeted exposure for investors looking for unique allocations. Such innovation has brought products dedicated to smartphones, cloud computing, fertilizer, and even the fishing industry. At first, investors may write some of these newer options off as silly investments or funds that are simply looking to cash in on the recent ETF success, but some of these products offer one-of-a-kind exposure that can be found nowhere else in the space. Take the Global X Fishing Industry ETF (FISN) for example, launched earlier this year, the fund exclusively offers exposure to the global fishing industry, a very niche space in the consumer sector [see also ETF Leaders: Best Performing ETFdb Portfolios of 2011].

While fishing investing may be very specialized, no one can deny the industry’s importance to human life throughout history. Fishing has historically been a mainstay activity both for economic prosperity as well as an important food source. From its primal roots up to today, fishing has remained an integral part of the lives of numerous people, so it makes sense that there is a fund dedicated to this robust sector. There are over 32,000 types of fish, and they exhibit some of the greatest species-diversity of any vertebrate. Unfortunately for the product that tracks these abundant creatures, FISN hit the market on choppy waters, with a number of factors converging to drag the ETF down more than 25% from its inception in May [see also Alternative Weighting Strategies & ETFs: Is Market Cap Weighting Flawed?].

The Fishing Fiasco

The holdings of FISN are entirely international (with 40% dedicated to Japan), which should come as no surprise. The U.S. is notorious for having strict laws when it comes to fishing as well as protecting wildlife, where other nations have little to no regulation on how they extract fish. The latter part has led to the endangerment of a number of species and global outcry from animal protection agencies and environmentalists alike. With little slowing them down in the way of government hurdles, it makes sense for this ETF to allocate all of its resources to international companies [see also Is Now The Time To Buy The China A-Shares ETF (PEK)?].

The trouble for this fund began before it was ever launched. On March 11th of this year, a devastating earthquake and subsequent tsunami wreaked havoc on much of Japan, including the Fukushima nuclear power plant. The plant, which had been severely damaged, leaked radiation into the surrounding environment, including the Pacific Ocean. Just months later, scientists were inspecting fish with abnormal radiation levels with some samples reading “up to 4,080 bequerels per kilogram of iodine-131, over twice the allowed limit of 2,000 bequerels per kilogram,” writes Gretchen Goetz. Once this was discovered, there was a major scare among consumers who have long been wary of fish for the mercury levels that some are known to contain.

Next came the launch of FISN itself on May 4th, and it was straight downhill from there. The fund never found its footing, as its heavy Japanese exposure put massive headwinds in FISN’s path. With a number of reports declaring certain fishing areas to be unsafe, the resulting consumer scare led to troubled times for fishing companies and their respective stock prices. In fact, China, the EU and “dozens of other countries have imposed restrictions on Japanese fisheries products, dealing a blow to the country’s $2.4 billion business in seafood exports, which account for more than 10 percent of the value of the entire industry” writes Justin McCurry.

At this point, it is hard to tell when the industry will recover in the near future, as it appears that radiation levels have long been under control, but consumer confidence in the sector seems to be at an all-time low. Below, we outline FISN in detail for investors interested in making  short or long play on this troubled market segment [see also ETF Insider: Which Way Will The Bulls Run?].

Fishing Industry ETF (FISN)

The ETF tracks the Solactive Global Fishing Index, which is designed to reflect the performance of the fishing industry. It is comprised of selected companies globally that are engaged in commercial fishing, fish farming, fish processing or the marketing and sale of fish and fish products. Top holdings include Toyo Suisan Kaisha, Cermaq ASA, and Marine Harvest ASA. The fund has a trailing 50 day volatility nearing 40%, making it a risky option. Furthermore, with just $1.6 million in assets and an ADV of just 1,800, the product is likely to exhibit loose bid/ask spreads which could further add to costs for investors. The product may turnaround if the fishing industry is able to recover, but for now this young fund is in choppy seas and could go either way heading into 2012 [see also Dividend ETF Investing: Four Critical Factors To Consider].

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Disclosure: No positions at time of writing.