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ETF Deathwatch For May 2016: List Jumps To 450

The quantity of exchange-traded funds (“ETFs”) and exchange-traded noted (“ETNs”) continues to zoom higher. There are now 450 products on the list, and the growth trajectory is on a path to surpass 500 by the end of the year. For May, there are 26 new names joining the list and 11 coming off. Only seven of the removals were the result of improved health – the other four died and lost their listings. The current membership consists of 342 ETFs and 108 ETNs. Further segmentation of the ETF population reveals that 41 are actively managed funds, 151 have smart-beta labels, and the remaining 150 are traditional capitalization-weighted ETFs. The surge of currency-hedged ETF introductions of the past two years continues to be problematic for the industry. The brief nine-month surge of the U.S. dollar in late 2014 and early 2015 generated a slew of currency-hedged ETF launches that continues to this day. However, with the dollar’s decline over the past 14 months, these funds have been at a performance disadvantage. As a result, they are failing to attract new assets, losing some of the assets they had, and ending up here on ETF Deathwatch. This month, six of the additions are currency-hedged ETFs. Twenty-six funds went the entire month of April without a trade, and 269 did not trade on the last day of the month. Additionally, six products have yet to record their first trade of 2016. It remains a mystery why some of these products exist and why the exchanges allow them to have a listing. The NYSE did take action against one ETN issued by Deutsche Bank (NYSE: DB ) in April. As outlined in ETF Stats for April , the NYSE suspended trading and delisted DB Commodity Long ETN (former ticker DPU) because its assets fell below $400,000. However, DB left shareholders holding the bag because it has no intention of automatically liquidating the ETNs and returning money to shareholders. Adding insult to injury, the notes do not mature for another 22 years. If owners are not willing to wait that long, then they will have to pursue the monthly round-lot redemption process or a sale in the over-the-counter markets. Keep this in mind before buying one of the 39 other DB-sponsored products that are currently on Deathwatch. The average asset level of products on ETF Deathwatch increased from $6.6 million to $6.8 million, and the quantity of products with less than $2 million fell from 98 to 96. The average age increased from 46.4 to 46.8 months, and the number of products more than five years of age surged from 148 to 177. The driving force behind the huge jump in five-year-old products on the list is that unloved family of iPath “Pure Beta” ETFs have now been on the market that long. Despite the lack of investor interest in these ETNs, Barclays continues to sponsor them, and the NYSE continues to collect a listing fee. Here is the Complete List of 450 ETFs and ETNs on ETF Deathwatch for May 2016 compiled using the objective ETF Deathwatch Criteria . The 26 ETFs and ETNs added to ETF Deathwatch for May: AlphaMark Actively Managed Small Cap (NASDAQ: SMCP ) CSOP China CSI 300 A-H Dynamic (NYSEARCA: HAHA ) CSOP MSCI China A International Hedged (NYSEARCA: CNHX ) Deutsche X-trackers CSI 300 China A-Shares Hedged Equity (NYSEARCA: ASHX ) ELEMENTS Rogers ICI Energy ETN (NYSEARCA: RJN ) ETRACS 2x Leveraged Long Wells Fargo BDC Series B ETN (NYSEMKT: LBDC ) ETRACS Monthly Pay 2x Leveraged Mortgage REIT ETN Series B (NYSEARCA: MRRL ) ETRACS UBS Bloomberg CMCI Series B ETN (NYSEARCA: UCIB ) Guggenheim MSCI Emerging Market Equal Country Wtd (NYSEARCA: EWEM ) iShares Currency Hedged MSCI South Korea (NYSEARCA: HEWY ) John Hancock Multifactor Healthcare (NYSEARCA: JHMH ) Morgan Stanley Cushing MLP High Income ETN (NYSEARCA: MLPY ) PowerShares Developed EuroPacific Hedged Low Volatility (NYSEARCA: FXEP ) PowerShares Dynamic Networking (NYSEARCA: PXQ ) PowerShares Japan Currency Hedged Low Volatility (NYSEARCA: FXJP ) PowerShares S&P 500 Momentum (NYSEARCA: SPMO ) PowerShares S&P 500 Value (NYSEARCA: SPVU ) PowerShares Zacks Micro Cap (NYSEARCA: PZI ) RBC Yorkville MLP Distribution Growth Leaders Liquid PR ETN (NYSEARCA: YGRO ) Reaves Utilities (NASDAQ: UTES ) SPDR MSCI China A Shares IMI (NYSEARCA: XINA ) The Restaurant ETF (NASDAQ: BITE ) VanEck Vectors Solar Energy (NYSEARCA: KWT ) WisdomTree BofA ML HY Bond Zero Duration (NASDAQ: HYZD ) WisdomTree Europe Local Recovery (BATS: EZR ) WisdomTree Global ex-U.S. Hedged Real Estate (BATS: HDRW ) The 7 ETPs removed from ETF Deathwatch due to improved health: Barclays Return on Disability ETN (NYSEARCA: RODI ) Global X Permanent (NYSEARCA: PERM ) Global X Scientific Beta US (NYSEARCA: SCIU ) IQ 50 Percent Hedged FTSE Japan (NYSEARCA: HFXJ ) iShares Global Inflation-Linked Bond (NYSEARCA: GTIP ) O’Shares FTSE Europe Quality Dividend (NYSEARCA: OEUR ) PureFunds ISE Junior Silver (NYSEARCA: SILJ ) The 4 ETFs removed from ETF Deathwatch due to delisting: Highland HFR Equity Hedge (NYSEARCA: HHDG ) Highland HFR Event-Driven (NYSEARCA: DRVN ) Highland HFR Global (NYSEARCA: HHFR ) DB Commodity Long ETN (NYSEARCA: DPU ) ETF Deathwatch Archives Disclosure: Author has no positions in any of the securities mentioned and no positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) is received from, or on behalf of, any of the companies or ETF sponsors mentioned.

The Dead Model

Click to enlarge How Lucky Do You Feel? Nine years ago, I wrote about the so-called “Fed Model.” The insights there are still true, though the model has yielded no useful signals over that time. It would have told you to remain in stocks, which given the way many panic, would not have been a bad decision. I’m here to write about a related issue this evening. To a first approximation, most investment judgments are a comparison between two figures, whether most people want to admit it or not. Take the “Fed Model” as an example . You decide to invest in stocks or not based on the difference between Treasury yields and the earnings yield of stocks as a whole. Now with interest rates so low, belief in the Fed Model is tantamount to saying “there is no alternative to stocks.” [TINA] That should make everyone take a step back and say, “Wait. You mean that stocks can’t do badly when Treasury yields are low, even if it is due to deflationary conditions?” Well, if there were only two assets to choose from, a S&P 500 index fund and 10-year Treasuries, and that might be the case, especially if the government were borrowing on behalf of the corporations. Here’s why: in my prior piece on the Fed Model, I showed how the Fed Model was basically an implication of the Dividend Discount Model. With a few simplifying assumptions, the model collapses to the differences between the earnings yield of the corporation/index and its cost of capital. Now that’s a basic idea that makes sense, particularly when consider how corporations work. If a corporation can issue cheap debt capital to retire stock with a higher yield on earnings, in the short-run it is a plus for the stock. After all, if the markets have priced the debt so richly, the trade of expensive debt for cheap equity makes sense in foresight, even if a bad scenario comes along afterwards. If true for corporations, it should be true for the market as a whole. The means the “Fed Model” is a good concept, but not as commonly practiced, using Treasuries – rather, the firm’s cost of capital is the tradeoff. My proxy for the cost of capital for the market as a whole is the long-term Moody’s Baa bond index, for which we have about 100 years of yield data. It’s not perfect, but here are some reasons why it is a reasonable proxy: Like equity, which is a long duration asset, these bonds in the index are noncallable with 25-30 years of maturity. The Baa bonds are on the cusp of investment grade. The equity of the S&P 500 is not investment grade in the same sense as a bond, but its cash flows are very reliable on average. You could tranche off a pseudo-debt interest in a way akin to the old Americus Trusts , and the cash flows would price out much like corporate debt or a preferred stock interest. The debt ratings of most of the S&P 500 would be strong investment grade. Mixing in equity and extending to a bond of 25-30 years throws on enough yield that it is going to be comparable to the cost of capital, with perhaps a spread to compensate for the difference. As such, I think a better comparison is the earnings yield on the S&P 500 vs the yield on the Moody’s BAA index if you’re going to do something like the Fed Model. That’s a better pair to compare against one another. Click to enlarge A new take on the Equity Premium! That brings up another bad binary comparison that is common – the equity premium. What do stock returns have to with the returns on T-bills? Directly, they have nothing to do with one another. Indirectly, as in the above slide from a recent presentation that I gave, the spread between the two of them can be broken into the sum of three spreads that are more commonly analyzed – those of maturity risk, credit risk and business risk. (And the last of those should be split into an economic earnings factor and a valuation change factor.) This is why I’m not a fan of the concept of the equity premium . The concept relies on the idea that equities and T-bills are a binary choice within the beta calculation, as if only the risky returns trade against one another. The returns of equities can be explained in a simpler non-binary way, one that a businessman or bond manager could appreciate. At certain points lending long is attractive, or taking credit risk, or raising capital to start a business. Together these form an explanation for equity returns more robust than the non-informative academic view of the equity premium, which mysteriously appears out of nowhere. Summary When looking at investment analyses, ask “What’s the comparison here?” By doing that, you will make more intelligent investment decisions. Even a simple purchase or sale of stock makes a statement about the relative desirability of cash versus the stock. ( That’s why I prefer swap transactions .) People aren’t always good at knowing what they are comparing, so pay attention, and you may find that the comparison doesn’t make much sense, leading you to ask different questions as a result. Disclosure: None