Funds That Are Built to Die
Making sense of the new breed of ETF.
Tuesday’s column about an exchange-traded fund, VelocityShares Daily Inverse VIX (henceforth to be called by its ticker, XIV), which lost 95% of its value before folding up shop this week, had me wondering: How common are catastrophic losses with ETFs? The possibility that a fund might collapse is a new thing for retail investors. Mutual funds do not melt down in that fashion, nor did the first wave of ETFs. However, the second and third waves of ETFs, often leveraged and/or investing in futures, are something different.
The answer: Over the trailing five years, 66 of the 1135 ETFs have annualized returns of less than negative 20%, meaning that their cumulative losses exceed 67%. In addition, more than 600 ETFs have expired. Since there were few ETFs before the year 2000, and fewer than 2200 ETFs now exist, that makes for a high and rapid death rate. Not all deceased funds were complete disasters—but most were bad at best, and some were much worse than that.