ETF risk, Size and Operational experience

Experience.  Inexperienced operation may enhance the high risk of investing in the subgroup of ETFs with geared returns, derivatives, and lending activities. At the time of this writing, year 2012, nearly two-thirds of ETFs are inexperienced as determined by their longevity of less than 5 years.  The ETF industry is relatively young and recovering from one of the worst recessions in history, the 2008 Financial Crisis.  ETFs older than 5 years offer more operational experience to long-term investors.

Size.  Nearly half of a group of 1,300 ETFs operate a portfolio with total assets below the minimum $50 million needed to earn a profit.   Most of these are still in operation when they should probably close down1.  One websiteprovides open source listings of endangered and terminated ETFs:

  • In September 2011, 163 endangered ETFs were at least 6 months old, holding less that $25 million in assets under management, and failing to generate a minimum acceptable level of trading activity defined in the web site.  These were placed on a watch list
  • In 2010, a total of 49 small ETFs closed operations

References

1.  J. Alex Tarquinio, Should More ETFs Shut Down? SmartMoney,
September 28, 2011.  http://www.smartmoney.com/invest/etfs/more-etfs-should-shut-down-1315932598095/

2.  Ron Rowland, Invest with an edge.  © 2011 AllStarInvestor.com, publisher of InvestWithAnEdge.com.,  http://investwithanedge.com/.

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