Sometimes, exchange-traded fund sponsors hit investment gold. PIMCO’s insanely successful Total Return ETF (NYSE:BOND) comes to mind. That fund has amassed nearly $4.7 billion in assets in a little more than a year.
But sometimes ideas and funds are perhaps a little ahead of their time. (Anybody remember the Claymore/Clear Global Vaccine Index ETF? Or the Global X Fishing Industry ETF?)
Generally, funds die when they fail to attract enough assets and, in turn, don’t generate enough revenue for the underlying sponsor. Fund issuers will either close the fund completely or tweak the underlying index/portfolio to better suit investor needs.
For example, ETF manager WisdomTree has made it a habit to shift strategies of its funds after a few years if investors are bypassing them for other ETFs. The latest example of this was its Europe Hedged Equity (NYSE:HEDJ). In its previous life, the fund was a total developed-market fund, which included exposure to Australia and Japan. The portfolio has since narrowed its focus.
So, given the fact that the Sustainable North American Oil Sands ETF (NYSE:SNDS) has less than $5 million in assets, it’s not surprising that the issuer — Exchange Traded Concepts — is reworking the fund to attract more investor interest.
What is surprising is how it’s doing this.
A High-Yield Fund-of-Funds?
I looked at SNDS when it launched back in June 2012. I mentioned that the ETF fell flat of its goals to track the performance of companies whose operations include production, refinement, midstream and provision of equipment/services in North American oil sands.
After the initial top holdings of oil sands producers, the remaining portfolio was divided among major integrated oil firms such as Exxon Mobil (NYSE:XOM) and PetroChina (NYSE:PTR). While these firms all do own oil sands assets and do have some bitumen production capabilities, those operations are a very small part of their overall business models.
At the end of the day, investors looking to SNDS specifically to get access to the Canadian oil sands would be getting the short end of the stick, as the fund’s performance would not be entirely tied to the oil sands market.
The market seems to have agreed with me, preferring other energy funds like the Guggenheim Canadian Energy Income (NYSE:ENY). SNDS has attracted only about $1.2 million in assets, and trades less than 1,000 shares a day. So it’s not surprising that Exchange Traded Concepts is changing the fund’s focus.
However, rather than beef up its energy exposure or broadening the ETFs mandate a bit, ETC has decided to completely go against the grain and make the ETF a vehicle to hold high-yielding closed-end funds.
Basically, it’ll be a fund of funds.
According to a new filing, SNDS will become the YieldShares High Income ETF — with the proposed ticker YYY — and track the ISE High Income Index. That index will invest in the top 30 U.S. exchange-listed, closed-end funds and could include exposure to equities, bonds of all stripes, preferred and convertible stock, commodities and REITs. The “new” YieldShares fund will cost a whopping 1.65% a year — including a 0.5% management fee — in expenses.
The Lesson for Investors
The fact that the Sustainable North American Oil Sands ETF is switching focus can serve as a lesson for future investors.
As much as I love ETFs, most of them are very “gimmicky.” They can be very powerful tools for the average Joe to construct a balanced and sophisticated portfolio. However, for every broad, marquee-named index ETF that actually deserves a place in your portfolio, there are 10 funds like the ALPS/GS Momentum Builder Asia ex-Japan Equities and U.S. Treasuries Index ETF (NYSE:GSAX). (Yes, that’s a real fund.)
Investors need to do their homework before they commit to a fund. SNDS promised oil sands exposure and came short of that goal. More importantly, there were more established funds that offered the same or better exposure to the “theme” it was trying to tackle.
Despite the fact that U.S. investors have about 1,500 ETFs to choose from, only the top three or four in each category have any real assets, trading volume and sustainability. For example, there are currently 27 different ETFs that focus on energy equities. Ranking them by assets, by about fund No. 7 on the list, both AUM and trading volumes drop off considerably.
While there are no hard-and-fast rules about how many assets a fund needs to have to be profitable and not at risk of closure, the bigger and more popular the better. Staying away from smaller products — which tend to be some of the most gimmicky — helps ensure that your fund will stick around.
As for the SNDS switch-over, Exchange Traded Concepts might have another flop on its hand. The proposed YYY will have to go up against the $461 million PowerShares CEF Income Composite ETF (NYSE:PCEF), which basically does the same thing as the YYY’s focus.
Perhaps it’s fitting that ETC chose a cursed ticker for the new fund. ETC will use the same ticker as the now-defunct Bear Stearns Active ETF — which only lasted six months before being delisted.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.