Scandinavian ETFs: We’ve Gotten Too Niche

by Charles Sizemore | February 3, 2012 12:55 pm

Imagine my frustration. I had identified what I believed to be an investable macro trend — the rise of the emerging market nouveau riche — and I had found a great ETF to play it, the Claymore Robb Report Luxury ETF. It was a collection of high-end jewelry, fashion, art and high-performance auto stocks; a one-stop shop for investing in the lifestyle trappings of millionaires.

It was the perfect investment for the next decade, and its performance while I held it was all that I could have hoped for.

Alas, no one else seemed to share my enthusiasm, and the ETF never managed to accumulate more than a couple million dollars in assets. Some days, its trading volume was zero; not a single share traded. Not too surprisingly, Claymore closed the fund a couple years ago. It wasn’t profitable to keep it open.

I tell this little sob story because I see it repeated quite often. The exchange-traded fund might be the best invention since the open-end mutual fund in the 1920s or perhaps the best since the stock market itself. ETFs add liquidity to the market, lower the cost of trading and allow for precise tactical allocation.

Alas, it is possible to have too much of a good thing. There came a point in the 1990s when there were more mutual funds in existence than there were publicly traded stocks. And while ETFs still have a long way to go before they reach that level of numerical saturation, they appear to have reached a different sort of saturation: thematic saturation.

Every conceivable investment theme under the sun now has an ETF that tracks it, whether it be South Korean small-cap stocks (SKOR[1]) or the direction of inflation (INFL[2]). Many themes have a leveraged fund too, and maybe an inverse fund or even a leveraged inverse fund. It should come as no shock that many of these funds fail to achieve critical mass. In 2011 alone, the following list of funds died (or are scheduled to die) with a whimper:

BARN. Cute, isn’t it?

Some of these funds might have limped along for another couple years were it not for the volatility of 2011, but frankly, it’s hard to imagine anyone missing them. Investors will have to find other ways to speculate on the price of waste management stocks.

Barclays iShares, the company that did more than anyone to make the ETF revolution happen, recently launched a series of new funds that likely will join this inglorious list:

The Denmark and Finland ETFs are the first of their kind, though the Norway ETF will go head-to-head with an existing competitor, the Global X Norway ETF (NYSE:NORW[19]). I’m not sure what surprises me more: the fact that two fund companies deemed Norway worthy of an ETF listing or that NORW has an average trading volume of 81,000 shares.

Even with iShares’ marketing budget, it’s hard to imagine investors embracing these Scandinavian ETFs. This is not to say that Scandinavia doesn’t have its share of world-class companies. Statoil ASA (NYSE:STO[20]) is a respected oil company (it also happens to represent fully 20% of the Norwegian stock market by market cap). Novo Nordisk (NYSE:NVO[21]) is another fine company — that happens to make up 23% of the Danish market.

I’m not a big fan of ETFs so heavily dominated by one company. There comes a point when you might as well just buy the individual stocks and be done with it.

Bottom line: If you’re bullish on Scandinavia, any of these ETFs are worth considering. But should you decide to buy, don’t plan on holding for too long. I’ll be surprised if these funds still are open five years from now.

Oh, and one more bit of advice: Use a limit order when buying. Given the low trading volume on the Danish and Finnish ETFs, it won’t take a large order to move the market.

Charles Lewis Sizemore, CFA, is the editor of the Sizemore Investment Letter, and the chief investment officer of investments firm Sizemore Capital Management. As of this writing, he did not hold a position in any of the aforementioned securities. Sign up for a FREE copy of his new special report: “4 Dividend Stocks to Buy and Forget.”[22]

  1. SKOR:
  2. INFL:
  3. CRBA:
  4. CRBI:
  5. TWON:
  6. HKK:
  7. RSUN:
  8. EMGX:
  9. EMVX:
  10. MEXS:
  11. XOIL:
  12. BARN:
  13. FISN:
  14. EATX:
  15. WSTE:
  16. ENOR:
  17. EDEN:
  18. EFNL:
  19. NORW:
  20. STO:
  21. NVO:
  22. “4 Dividend Stocks to Buy and Forget.”:

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