The exchange-traded fund business had a record year in 2016. An astounding $284 billion in net flows went into U.S.-listed ETFs. For anyone who’s counting that’s about $1,000 per capita.
Passive investing, a big contributor to ETF growth, was an indirect beneficiary of this record-setting year. ETFs and mutual funds using passive investing saw net inflows of $504.8 billion in 2016 while active management across both platforms saw outflows of $340.1 billion, a net change of $844.9 billion.
Perhaps the most ironic statistic from 2016: Vanguard’s active management business attracted a staggering $20.4 billion, about double the second-highest recipient. That’s a definite kick to the midsection of active managers everywhere.
Naturally, the popularity of ETFs has led to all sorts of new funds — 31 were launched in December 2016 alone — and not all of them are going to be successful. Otherwise, you wouldn’t see 464 funds on the ETF Deathwatch list.
No doubt there have been some successful ETF launches in 2016 — the SPDR SSGA Gender Diversity Index ETF (NYSEARCA:SHE) comes to mind, which got a $250 million head start from the California State Teachers’ Retirement System when it launched last March. Less than a year old, it has $274.4 million in total net assets as of Feb. 1.
If investors are smart they’ll take a closer look at this one; the evidence suggests women-led businesses do better.
Now on to the worst ETFs in the world.
A total of 247 ETFs and ETNs were launched in 2016 while 128 closed for a net increase of 119. Rather than go through all the ETFs, I’ll highlight the worst ETFs launched in the last three months of the year.
May the worst ETFs win.
The Worst ETFs: Spirited Funds (WSKY)
Expenses: 0.75%, or $75 per $10,000 invested annually.
It saddens me to say this given how much I love whiskey and other brown spirits but I’ve got to go with the Spirited Funds/ETFMG Whiskey & Spirits ETF (NYSEARCA:WSKY) which was launched Oct. 12 and has managed to attract about $2.5 million in total assets in the three months it has been public.
Conceptually, I get the idea behind the fund, which invests in 23 companies around the world, most of which are manufacturers of spirits, wine and beer. Many of the holdings are unavailable on U.S. stock exchanges. However, the top 10 holdings account for 78.9% of the portfolio, with Diageo Plc (ADR) (NYSE:DEO) in the number one position at a weighting of 24.1%.
“We believe we’re at year five of a 25-40 year supercycle that could see continued growth in consumer demand for whiskey and spirits, much like what has occurred with craft breweries over the past two decades,” said David Bolton, president and CEO of Spirited Funds. “Our new exchange-traded fund is the first to provide exposure to this global industry.”
That much is true.
But why pay an annual management fee of 0.75% when you can simply buy Diageo stock — a good proxy for the liquor industry and the largest producer in the world — and do so for no more than the brokerage commission?
This one reads “marketing ploy” despite its obvious attraction and will face a difficult time surviving beyond its first 12 months.
The Worst ETFs: USCF Restaurant Leader Fund (MENU)
This next example is another case of something that looks great on the drawing board but leaves me scratching my head.
The USCF Restaurant Leaders Fund (NYSE:MENU) was launched Nov. 8, the 13th product to be listed by USCF who are best known for its United States Oil Fund LP (ETF) (NYSEARCA:USO), an ETF with a track record of more than a decade and $3.1 billion in total net assets.
USO’s a winner without a doubt.
So, what’s my beef with MENU?
Two things, really.
First, while niche ETFs like MENU can be easily explained to novice investors who don’t have a lot of time to research all the companies held by the fund, professional investors are simply going to go out and buy the top five or 10 holdings in the index that MENU tracks and call it a day.
Add to this the fact the The Restaurant ETF closed in December after just 14 months in existence gathering less than $2 million in total net assets.
MENU’s got the ETF Deathwatch list written all over it.
The second and more distressing thing about this ETF is that the people behind USCF have launched some really interesting funds in addition to the USO.
My favorite being the Stock Split Index Fund (NYSEARCA:TOFR), a group of 30 stocks who’ve split 2-for-1 or greater at some point in their recent path. It’s brilliantly simply yet passively active and most importantly, it works.
The Worst ETFs: The Wear ETF (WEAR)
This last fund could easily be the winner of the worst ETFs because it charges 0.85% annually for something that’s essentially a large-cap tech fund.
I’m talking about The WEAR ETF (BATS:WEAR). Launched on Dec. 9, WEAR tracks the performance of the Wearables Index, a group of 59 companies that participate in the wearables market and/or produce components to make these devices.
Again, it seems like a good idea until you realize that for 38 basis points less you can own the iShares Exponential Technologies ETF (NYSEARCA:XT), an ETF with 201 holdings which also focuses on technological transformation.
Given the shape Fitbit Inc (NYSE:FIT) is in, it seems to me that the last place you want to be focusing your x-ray vision is on the wearables market. Consumers aren’t flocking to smart watches nearly enough to make this a worthwhile niche.
Don’t WEAR this particular ETF.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.