A growing horde of small ETFs are turning into thinly traded zombie funds. Why? There aren’t enough investors to provide trading volume for all of these ghouls.
WSJ: “Individual investors losing out: That’s the risk with this zombie underclass” of ETFs… “People will have bad experiences.”
While ETF ideas are infinite, investor capital isn’t. Now ETFs worth a whopping eight billion dollars are under-traded, and carrying bid-ask spreads so wide you could throw a ghast through them.
In some cases, spreads shoot straight through the roof. The Claymore U.S.-1-The Capital Markets Index ETF had an average spread over 13% in the first seven months. Seven of the 34 Claymore ETFs had average spreads of 2% or more in that period.
A 2% spread means a 4% round-trip cost, which makes a 13% spread into a painful 26% round-trip gouging. Such massive spreads amount to hidden costs well above the fees actually charged by the funds.
Abnormal Returns, who presciently warned of this problem three years back, says the zombie contagion is far from over. New ETFs, multiplying and splintering into ever-finer investment niches, only exacerbate the problem.
So how can we contain this? Stay out of the dark. Do your homework, and make sure the funds you invest in won’t turn nasty once the investor spotlight moves on.
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