Exchange traded funds are both a blessing and the curse for individual investors these days. On the plus side, good ETFs allow folks easy access to sector bets and diverse investments with low fees and ease of trading. On the down side, everybody and their cousin is getting into the ETF game and creating an increasingly muddled marketplace makes selecting the best fund difficult.
Specifically, there are over 1,000 ETFs to choose from, with more than 230 new ETFs launched in the last year alone – and over 700 more in the pipeline if you believe a report from IndexUniverse.
So how do we fix this mess? Simple: The ETF marketplace should focus on quality and not quantity.
That’s in the best interests of fund managers as well as investors. For instance, a top strategist at ConvergEx group told the Financial Times just 17 of the funds debuting last year attracted enough investors to generate “worthwhile profits”– that is, more than $100,000. And according to Business Insider, at the end of November, more than 350 ETFs held under $25 million in assets “a rule-of-thumb break even point for ETF issuers.” The market clearly can’t support a universe of ETFs this size.
So allow me to offer my suggestions for the first 3 funds that should be first in line on the chopping block:
Direxion Airline Shares ETF (FLYX)
Leveraged ETFs – that is, funds that are meant to provide two times or three times a benchmark – are the bread and butter of Direxion. But the fund manager dipped its toes into the conventional ETF game space with the lift-off of the Direxion Airline Shares ETF (NYSE: FLYX). Why? First off, we already enjoy the meager Guggenheim Airline ETF (NYSE: FAA) – which had less than $40 million in assets as FLXY took off.
What’s more, it’s not like airlines are a dynamic group of stocks with a lot of new companies or a wide variety of strategies or a big universe of stocks. The icing on the cake is that BOTH of these are simply benchmarked to the NYSE Arca Airline Index and don’t have a creative bent of their own.
One has to go – and since FLYX debuted just three months ago, I nominate this Direxion ETF to get the axe.
B2B Internet HOLDRS (BHH)
Ok, put your thinking caps on — because the B2B Internet HOLDRS (NYSE: BHH) is not an easy product to explain. In fact, the complexity is a top reason to kill it.
But let me do the best I can in a few sentences: First off, BHH is not technically an ETF — it charges a flat fee for every lot of 100 HOLDR Units, and that fee is deducted from distributions. HOLDRS treat acquisitions of underlying companies differently than most ETFs. Secondly, acquisitions are treated in a drastically different manner — if a component stock is bought out, investors in BHH are treated as normal shareholders and given a cash distribution in proportion to their HOLDR units. That’s why on paper the fund has lost 98% since inception and has a mere two components — it has “sold off” its assets.
As you can see, this is a very strange arrangement. And while innovations on Wall Street should be encouraged, your typical retail investor has an awful hard time wrapping their head around something like this.
Though I guess I shouldn’t make too much of a fuss – all we have to wait for holdings Ariba Inc. (NASDAQ: ARBA) and Internet Capital Group (NASDAQ: ICGE) to get bought out, and this fund will have no other component companies and thus no value.