IndexUniverse reported that Global X will be closing several ETFs for lack of AUM. Included in the list are the Fishing ETF (FISN) and the Farming ETF (BARN). Both fisheries (although subtle, I think this would have been a better name than fishing) and farming are themes that I have written about many times and I continue to believe are valid.
However stocks in both, as I mentioned recently in another post, are far more volatile than the underlying demand for protein. Look at the charts for the companies in the funds and you will see they are difficult to own. The combination of being difficult and unlucky timing is what hurt these funds, in my opinion. At some point the stocks within will again catch fire but obviously at that time investors will only have individual stocks to choose from.
The funds got made fun of a lot which I never fully understood. They targeted narrow niches, turned out not to catch on and so they are being closed. Investors were not hurt in any sort of unique or flawed product manner, the funds simply did poorly like any individual stock or narrow fund might.
The other bit of ETF news, also reported by IndexUniverse, is that ProShares has filed for a suite of low volatility ETFs. Broad based, low vol ETFs are being issued left and right and attracting a lot of AUM. The PowerShares S&P 500 Low Vol ETF (SPLV) has attracted $700 million in about ten minutes of trading (hyperbolic comment).
The funds in the filing are targeted to track the Nasdaq 100, Dow 30, Russell 2000, Russell 1000, MSCI EAFE, MSCI Emerging Market and the S&P Mid Cap 400. You can read the IU link for more specifics but basically the strategy will be to increase or decrease equity exposure to the respective index based on realized volatility of that index going above or below 15%.
Obviously I have no idea how well these particular funds will work but SPLV and the EG Shares Low Volatility Emerging Market Dividend ETF (HILO) have both traded as advertised in the short histories.
I think these funds, the ones that end up working as advertised, offer a chance for the core and explore concept to evolve. One aspect of portfolio construction and management for do-it-yourselfers is limited time available to spend on the task. The drawback for using regular cap weighted, broad funds is the lack of portfolio precision and absorbing every bump on the way down.
The low vol funds are obviously designed so that holders do not absorb every bump on the way down (you need to decide for yourself whether they achieve that objective). A broad based fund portfolio capturing various segments (small cap, emerging and so on) could be assembled using low vol fund with some disproportionately large chunk of the portfolio and put the smaller portion into various themes, niches or countries.
This could end up as some combo for the equity portion of four or five low vol funds for the broad portion combined with maybe five individual stocks or narrow ETFs as described above. Keeping track of ten holdings would address the time constraint issue that some folks have. Defensive action could be achieved, at least partly, by selling or reducing exposure in the narrow holdings. The remaining broad, low vol holdings would (or should) be less volatile than straight beta holdings and maybe even have a higher yield.
I am not about to switch to this approach but it can be valid way to go; broad access, some specialty exposure, the chance for more yield and no 40 hour time requirement. For some this would be a very good way to go.
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7 comments:
I have mentioned many times before that I think there is essentially no way to invest in American "farming" through publicly traded securities. Investing indirectly in Deere, fertilizer companies, grain merchants etc is dubious as a proxy for investing in "farming".
I will repeat again...the government farm programs have a huge impact on farming profitability though commodity programs and crop insurance. I am not sure that a publicly owned corporation can participate in government programs. I do know that there is now a requirement to certify income (farm vs non-farm) and you have to allow the USDA to have access to IRS tax returns in order to verify eligibility.
There is a huge disconnect between agricultural real estate prices and the ability of harvesting underlying crops to pay for them. In my area a great deal of farm land is owned by highly leveraged private equity outfits. They are all finding out that they aren't as smart as they thought they were and are generally outfoxed by "hayseed" farmers. In the end, I believe that the medium to large sized family farms will ultimately win.
What happens to an investor's investment in an ETF when it "closes".
Investors holding an ETF when it closes get cashed out at NAV.
I would suggest not waiting until it actually closes because you may have to wait a few days to actually make use of the money as opposed to just selling before a fund actually stops trading.
anon 8:32
I had a similiar experience in the medical area. Worked for a medium- sized firm that was bought out by a private investment group. It was then run for the number crunchers and the medical quality slipped dramatically...because no one cared about that aspect any longer. The company was eventually run out of business and everyone lost their jobs.
Shale gas is a game changer for the Ag trade, as natural gas will put major long term pressure on corn prices, which has been the fulcrum for the Ag investment thesis.
Couple shale with the overbuilt China housing market, and I think you will see a drag on Brazil, a big Ethanol importer.
Another factor is the US government fiscal mess, and the question on weather austerity will make its way down to Ethanol and Ag subsidies.
I get the long term protein story, but the current valuations are more a reflection of corn/energy, which is unsustainable.
I will add that I think there are only two ways for corporate farms to be more profitable than privately owned farms. This stems from the fact that farmers cannot set prices, they have no pricing power that is...they are price takers.
1) Lower costs. Not likely to happen since the corporate tax rates are not farmer friendly. Many private farmers have ways of splitting into sub entities to take advantage of tax law and govt programs.
2) Economies of scale. In theory this sounds good, but in execution point 1 from above limits effectiveness.
I just don't feel that there is an "easy" way to gain financial exposure to American farming. Maybe I'm wrong.
Think of the runup in farm land prices like a runup in the stock market. The high P/E ratio in the stock market eventually reverts to the mean...so shall farming. In my area the P/E ratio for farmland is about 35.
Competing $ will look for a better investment. Speculators will be burned.
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