Funds That Are Built to Die

Making sense of the new breed of ETF.

John Rekenthaler 01 March, 2018 | 16:12
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Disposable Funds
The VelocityShares Daily Inverse VIX (henceforth to be called by its ticker, XIV), which lost 95% of its value before folding up shop last week, had me wondering: How common are catastrophic losses with ETFs? The possibility that a fund might collapse is a new thing for retail investors. Mutual funds do not melt down in that fashion, nor did the first wave of ETFs. However, the second and third waves of ETFs, often leveraged and/or investing in futures, are something different.

The answer: Over the trailing five years, 66 of the 1135 ETFs in the U.S. have annualized returns of less than negative 20%, meaning that their cumulative losses exceed 67%. In addition, more than 600 ETFs have expired. Since there were few ETFs before the year 2000, and fewer than 2200 ETFs now exist, that makes for a high and rapid death rate. Not all deceased funds were complete disasters—but most were bad at best, and some were much worse than that.

(If, at this point, you remain unafraid of fringe ETFs, consider this: 25 ETFs are down more than 40% per year. That translates to an almost 80% cumulative decline, cumulatively. Among that group, seven have annualized losses exceeding 60%. I once held an investment that fell by 60%, and that wasn’t much fun. But it rebounded the following year, rather than losing 60% again and again and again and again.)

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John Rekenthaler  is vice president of research for Morningstar.

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