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ETF Deathwatch For January 2015: The Year Begins At 322

ETF Deathwatch begins 2015 with 322 products on the list, consisting of 222 ETFs and 100 ETNs. Fourteen names joined the lineup this month and nineteen exited. Just nine came off due to improved health, while the other ten met their death and no longer exist. Despite the closure of about 450 ETFs and ETNs over the past decade, there are still 322 zombie products remaining, and they average just $6.4 million in assets. The average age of these products is 47 months, more than enough time to attract a little investor interest. Clearly, these products are neither desired by investors nor profitable for their sponsors, making one tend to wonder why they still exist. The fourteen new names on the list this month include a dozen based on MSCI indexes, nine ‘quality’ ETFs from State Street SPDRs, and two ‘low volatility’ products from BlackRock iShares. There are dozens of successful products tracking MSCI indexes, carrying SPDR and iShares brands, and pursuing factor-based strategies, yet these new additions are struggling. The recipe for success obviously requires more than just having the right ingredients. Thirty-six brand names appear on ETF Deathwatch, and two of these brands have their entire product line on the list. All five Columbia ETFs are included. These actively managed funds have been on the market about five years, yet none have gathered more than $10 million in assets. QuantShares is the sponsor of four ETFs, all more than three years old, all with less than $4 million in assets, and all on ETF Deathwatch. It’s now 2015, which means a second calendar year has come and gone without the iPath Short Enhanced MSCI Emerging Markets Index ETN (NYSEARCA: EMSA ) registering a single trade. November 9, 2012 was the last time EMSA saw any action, and there were only 100 shares traded that day. It was just one of eight products going the entire month of December without a transaction. Additionally, 145 products failed to register any volume on the last day of the year. Here is the Complete List of 322 Products on ETF Deathwatch for January 2015 compiled using the objective ETF Deathwatch Criteria . The 14 ETPs added to ETF Deathwatch for January: First Trust ISE Global Platinum (NASDAQ: PLTM ) iPath Bloomberg Industrial Metals ETN (NYSEARCA: JJM ) iShares MSCI Asia ex Japan Minimum Volatility (NYSEARCA: AXJV ) iShares MSCI Emerging Markets Consumer Discretionary (NASDAQ: EMDI ) iShares MSCI Europe Minimum Volatility (NYSEARCA: EUMV ) SPDR MSCI Australia Quality Mix (NYSEARCA: QAUS ) SPDR MSCI Canada Quality Mix (NYSEARCA: QCAN ) SPDR MSCI EAFE Quality Mix (NYSEARCA: QEFA ) SPDR MSCI Emerging Markets Quality Mix (NYSEARCA: QEMM ) SPDR MSCI Germany Quality Mix (NYSEARCA: QDEU ) SPDR MSCI Japan Quality Mix (NYSEARCA: QJPN ) SPDR MSCI Spain Quality Mix (NYSEARCA: QESP ) SPDR MSCI United Kingdom Quality Mix (NYSEARCA: QGBR ) SPDR MSCI World Quality Mix (NYSEARCA: QWLD ) The 9 ETPs removed from ETF Deathwatch due to improved health: First Trust Developed Markets x-US Small Cap AlphaDEX (NYSEARCA: FDTS ) First Trust Managed Municipal (NASDAQ: FMB ) Global X Junior MLP ETF (NYSEARCA: MLPJ ) iPath Pure Beta Broad Commodity ETN (NYSEARCA: BCM ) iShares Currency Hedged MSCI EAFE ETF (NYSEARCA: HEFA ) PowerShares DB Crude Oil Short ETN (NYSEARCA: SZO ) ProShares Global Listed Private Equity (BATS: PEX ) RevenueShares ADR (NYSEARCA: RTR ) Teucrium Soybean (NYSEARCA: SOYB ) The 10 ETPs removed from ETF Deathwatch due to delisting: Market Vectors Bank and Brokerage (NYSEARCA: RKH ) Market Vectors Colombia (NYSEARCA: COLX ) Market Vectors Germany Small-Cap (NYSEARCA: GERJ ) Market Vectors Latin America Small-Cap (NYSEARCA: LATM ) Market Vectors Renminbi Bond (NYSEARCA: CHLC ) Teucrium Natural Gas (NYSEARCA: NAGS ) Teucrium WTI Crude Oil (NYSEARCA: CRUD ) EGShares Emerging Markets Dividend Growth (NYSEARCA: EMDG ) EGShares Emerging Markets Dividend High Income (NYSEARCA: EMHD ) Direxion Daily Gold Bear 3x Shares (NYSEARCA: BARS ) ETF Deathwatch Archives Disclosure covering writer, editor, and publisher: No positions in any of the securities mentioned . No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.

Finally A New Airline ETF Prepares To Take Off

The U.S. aviation industry has been on cloud nine since the oil price succumbed to gravity. Moreover, a pickup in the domestic economy, rising cargo demand, a boost to tourism and the subsiding Ebola scare put the industry in the top-performing category. The sentiment around the sector was so bullish that Airlines rocketed to the highest level since 2001 in late December, per Bloomberg . Investors should note that the ETF industry was largely unable to reap the return out of this booming industry as Guggenheim closed the last airline ETF Guggenheim Arca Airline ETF (NYSEARCA: FAA ) in 2013. Prior to that, Direxion Airline Shares ETF (NYSE: FLYX ) had also faced the same fate in 2011. However, to fill the void, a new airline ETF has been filed lately. The fund looks to trade under the name of U.S. Global Jets ETF (JETS) . The Proposed Fund in Detail The passively managed product intends to track the U.S. global Jets Index that considers worldwide airline companies, per the prospectus. The index attaches weight to the companies on the basis of the square root of their average daily volume seen in the trailing three months. The index looks to consider 25 to 40 airline stocks across the market. The product will charge 60 bps in fees. How Does it Fit in a Portfolio? The global aviation industry holds a steady outlook for 2015. The outlook is especially positive for the U.S. economy, with GDP growth gaining momentum. Consolidation benefits, growing travel demand and enhanced ancillary revenues also provide an impetus for growth. Other regions including the Middle East, Latin America & Africa and Asia-Pacific also hold promise. Several Gulf-based airlines continue to build up their positions within the global airline industry. Fleet development should improve over the coming years. Apart from the high demand from the oil rich Gulf nations, a major part of the fleet demand will be driven by China and India, and continuous expansion of low budget carriers around the world. If this was not enough, an unexpected plunge in oil prices turned out to be the real catalyst in propelling the industry. Airline profit outlook depends on fuel prices, the major variable component in the industry. The oil price drop of about 50% seen in 2014 is yet to turn around in 2015. In such a bullish backdrop, the upcoming airline ETF has every reason to be successful, if it gets approval. ETF Competition The road ahead for the proposed ETF is nothing but clear skies. The industry has long been waiting for such a product after the shutdown of the Guggenheim fund. While there are no direct competitors to the product, investors should note that two transportation ETFs, namely the iShares Transportation Average ETF (NYSEARCA: IYT ) and the SPDR S&P Transportation ETF (NYSEARCA: XTN ) have weight in the airlines industry. While IYT puts about 45% of its weight in the airlines, air freight & logistics sectors, XTN places about one-fourth of the fund in them. We expect the newly filed product to cash in on the underlying sector’s allure and find a solid following among investors. Nonetheless, the two transportation ETFs could eat into the proposed fund’s asset base because of the formers’ diversified approach to the transportation sector. Still, investors solely eyeing the global aviation industry would be satisfied by the proposed JETS ETF.

2 Weeks Later: Did Mean Reversion Of CEFs Take Place?

Summary Annual rebalancing in YYY/CEFL led to systematic inflation and suppression of CEF prices. A previous article suggested to sell the CEFs that were added to the index and to buy the CEFs that were removed, after the rebalancing date. Two weeks later, some evidence of mean reversion is observed, though most of these effects were not statistically significant. Introduction In a previous series of articles, we explored interesting events that happened to the YieldShares High Income ETF (NYSEARCA: YYY ), a CEF “fund-of-funds,” and the ETRACS Monthly Pay 2xLeveraged Closed-End Fund ETN (NYSEARCA: CEFL ), the 2X leveraged version of YYY, at the end of the year. Both funds are based on the ISE High Income Index [YLDA], which rebalances annually on the last trading day of each year. After ISE gave notice of the proposed changes that it planned to make to the index on 12/24/2014, we observed high-volume buying of CEFs that were to be added to YYY/CEFL, and high-volume selling of the CEFs that were to be removed. The latter acted to depress the prices of existing constituents in the fund, causing YYY to significantly underperform the PowerShares CEF Income Composite Portfolio ETF (NYSEARCA: PCEF ), a CEF fund-of-funds that tracks a different index. Moreover, we observed price “spikes” for the underlying CEFs at the close of 12/31/2014, suggesting that YYY/CEFL were forced to rebalance at unfavorable prices. On the next day, 1/2/2015, YYY fell 1.25% (and CEFL fell 2.96%) on a day where stocks, bonds and PCEF held relatively flat. YYY Total Return Price data by YCharts The second of the articles suggested a third possible way in which YYY/CEFL investors could lose money: reversion of premium/discount values of the CEFs that had been added to the index. The heavy buying of these CEFs had pushed the premium/discount values of those funds to higher (i.e. more expensive) levels, leaving investors in those funds susceptible to reversion in premium/discount values. Thus, the article suggested to sell the CEFs that were added to the index and to buy the CEFs that were removed from the index to take advantage of mean reversion. This article provides an update on whether that hypothesis played out. Results and discussion The second of the articles was published on 1/6/2015, as it took me a few days to piece together the events surrounding the rebalancing event. Nevertheless, I will be using 1/2/2015 as the starting point for the performance comparisons as this is the day after the rebalancing took place. CEFs that were added We first consider the 10 CEFs that had the highest increases in allocation upon YYY rebalancing. Those 10 CEFs had increases ranging from 3.52% for ISD to 4.59% for DSL. The following graph shows the total return performance for those 10 CEFs from 1/2/2015 to 1/16/2015 (just over two weeks). EDD Total Return Price data by YCharts Those 10 CEFs had an average performance of -1.26%. The following table shows the premium/discount values for those 10 CEFs two weeks ago (1/5/2015) and today. CEFs are arranged in order of increasing premium/discount on 1/5/2015. Two weeks ago Today Change EDD -10.51 -10.42 0.09 GLO -10.2 -11.39 -1.19 PCI -9.43 -9.64 -0.21 HYT -9.22 -9.02 0.20 MCR -8.47 -11.98 -3.51 DSL -7.9 -8.06 -0.16 GHY -7.51 -5.13 2.38 ISD -7.11 -6.88 0.23 AWP -7.04 -11.52 -4.48 FPF -6.68 -7.85 -1.17 Average -8.41 -9.19 -0.78 We can see that premium/discount value of these 10 CEFs decreased by an average of -0.78%. The following chart displays the change in premium/discount values graphically, with CEFs arranged from the largest change to the smallest. We can see that 4 of the CEFs saw an increase in premium/discount value, while 6 of the CEFs saw a decrease in premium/discount value. Notably, the four funds that had the greatest decrease in premium/discount values (FPF, GLO, MCR and AWP) were the exact same funds that had the greatest positive deviation from 1-year historical premium/discount value two weeks ago (the largest white bars in this chart linked from my previous article). Overall, these data appear to support the hypothesis that the CEFs that were added to the index saw an inflation of value before rebalancing, making them susceptible to losses (average performance = -1.26%) as their premium/discount values reverted (average change in premium/discount = -0.78%). However, neither the average performance or the average change in premium/discount values were found to be statistically significant. CEFs that were removed We next consider the 10 CEFs that underwent the largest decreases in allocation upon rebalancing. Those 10 CEFs had decreases ranging from -4.18% for BOE to -5.76% for BCX. The following graph shows the total return performance for those 10 CEFs from 1/2/2015 to 1/16/2015 (just over two weeks). BOE Total Return Price data by YCharts Those 10 CEFs had an average performance of -0.08%. The following table shows the premium/discount values for those 10 CEFs two weeks ago (1/5/2015) and today. CEFs are arranged in order of increasing premium/discount on 1/5/2015. Two weeks ago Today Change BCX -16.01 -15.23 0.78 BOE -13.30 -12.27 1.03 ETJ -10.19 -9.82 0.37 JGH -9.59 -12.62 -3.03 MIN -9.29 -8.01 1.28 ETW -9.04 -7.75 1.29 NFJ -7.61 -6.57 1.04 ETV -4.11 -3.54 0.57 GAB -3.85 -2.75 1.10 PHK 48.45 55.84 7.39 Average -3.45 -2.27 1.18 We can see that premium/discount value of these 10 CEFs increased by an average of 1.18%. The following chart displays the change in premium/discount values graphically, with CEFs arranged from the largest change to the smallest. We can see that 9 of the CEFs saw an increase in premium/discount value, while 1 of the CEFs saw a decrease in premium/discount value. Overall, these data appear to partially support the hypothesis that the CEFs that were removed from an index saw a suppression of value before rebalancing. While the majority of CEFs saw an increase in premium/discount value (average change = 1.18%), this did not translate into a higher performance (average performance = -0.08%). As before, neither the average performance or the average change in premium/discount values were found to be statistically significant. Personal trade I also described my personal trade in the previous article: At the open of 1/5/2015, I sold all but a token position in CEFL, and instead replaced the position with ETW, ETV, NFJ, PHK and PTY. All five CEFs were removed from the index, and the first four were among the top 10 funds undergoing the largest decreases in allocation. The following chart shows the total return performance for CEFL and those 5 CEFs from 1/2/2015 (the close of this day roughly corresponds to the open of 1/5/2015) to today (about two weeks). ETW Total Return Price data by YCharts Happily, my selection of CEFs that I purchased at the open of 1/5/2015 did much better than CEFL over the past two weeks. The average of the 5 CEFs was +0.59%, while CEFL fell -3.75%. Summary Two weeks after rebalancing, the 10 CEFs that were added to the index saw an average decline of -1.26%, while the 10 CEFs that were removed from the index saw an average decline of -0.08%. Meanwhile, 8 CEFs that were not substantially impacted by rebalancing exhibited an average gain of +0.35%. However, a statistical test showed that none of these average performances were significantly different from 0%, with the -1.26% decline for the 10 CEFs that were added being the closest to significance (p-value = 0.066). Moreover, we saw some evidence of mean reversion in premium/discount values taking place. The average change in premium/discount of the 10 CEFs that were added was -0.78%, while that for the 10 CEFs that were removed was +1.18%. However, these average changes were again not significantly difference from 0%. The difference between the average premium/discount change of -0.78% for the 10 CEFs added compared with +1.18% for the 10 CEFs removed was close to being significant (p-value = 0.069). Has mean reversion for these batch of CEFs been fully played out? For CEFs like AWP, the answer is probably yes, as its premium/discount dropped 4.48 percentage points (from -7.04% to -11.52%) over the course of two weeks, and is now once again close to its 1-year average of -11.21%. One must look at each CEF individually to evaluate its deviation from its historical premium/discount averages. Hopefully, we will have a chance to revisit this idea at the end of 2015 to see if the same phenomenon occurs or whether these artificial deviations, being now more well-known, will be arbitraged away.