Thinly sliced niche exchange traded funds provide exposure to arcane parts of the market, but they may not be what investors had in mind when they purchased them. (“Thinner and Thinner: ETF Providers Cut Market Into Ever-Narrower Slices,” Wall Street Journal).
BlackRock’s iShares MSCI All Peru Capped Index is a case in point. Assuming an investor wants or needs Peru to diversify a portfolio (as opposed to buying a broadly diversified Global or overseas fund), or assuming a person just wants to speculate on Peru, the BlackRock fund may not be what either type of customer had in mind, because 19% of its assets are shares of a single mining company and its top 3 holdings comprise 45% of the fund. BlackRock explains: it reflects “the universe of Peruvian equities’ Some countries have economies that are more diversified than others.”
The UBS Etracs ISE Solid State Drive Index provides exposure to about 11 companies that make a new type of hard drive. Morningstar questions its usefulness for most people. UBS explains that it is useful for investors who wish to speculate that at least one of the eleven companies it tracks will make a fortune as the computer industry upgrades to the new disk drives from the less-efficient “rotating” drives in most computers today. It purportedly allows investors to hedge their bets on who the eventual winner(s) will be.
Morningstar says that about 25% of the exchange traded funds and notes it tracks have less than $10 million in assets. That makes an ETF relatively easy to shut down, which may help explain why providers keep “slicing and dicing” in search of “surprise left-field hits,” according to the article. “It’s like throwing Jell-O against the wall. Some of it sticks,” one ETF seller was quoted as saying.
Niche exchange traded funds are extremely risky. The problems associated with such funds include overconcentration, high fees, illiquidity, lack of transparency, high premiums or discounts relative to net asset value, and tax consequences of a fund closures. They are unsuitable for many investors.
John Bogle, the founder of Vanguard and the creator of the first index mutual fund, said of them: “It’s insanity. This is a classic case of Wall Street trying to capitalize on the worst instincts of investors.”
Page Perry is an Atlanta-based law firm with over 170 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 45 occasions. Page Perry’s attorneys have extensive experience in representing investors in cases involving ETFs and other alternative investments. For further information, please contact us.