Zombie ETFs |
| Credit: Etsy |
First of All What is an ETF?
• ETFs are funds that aim to replicate the performance of a specific market index or sector. Some are tied to the biggest and broadest indexes like the S&P 500 Index, while others are tied to indexes or other performance measures for a specific sector such as oil, cloud services, or emerging markets.
• ETFs are very popular with individual investors because they can produce results comparable to those of mutual funds or professional investment managers but with lower fees. The industry average fee for an ETF is 0.45%, compared with an average expense ratio of 0.5% to 1% for a mutual fund
What is a Zombie ETF?
• A zombie exchange-traded fund (ETF) is an ETF that is generating little interest from new investors. This ETF is described as a zombie because it isn't growing and making money for the asset manager that issued it..
• When ETFs enter zombie territory, it is usually only a matter of time before they are shut down. In these cases, account holders get their money back. Unfortunately, account holders may make less money than they had hoped, and may also get hit with a big tax bill.
Understanding Zombie ETFs
• ETFs that enter zombie territory are more likely to close than they are to come back from the dead. Closures can be seen as a good thing for the industry, ridding it of its rubbish and helping asset managers learn from their past mistakes and come up with more suitable solutions.
• There is no universal guideline on when a zombie ETF will be put down. Some issuers give a generous timeline for a new fund to season and start generating interest, while others are able to make quick calls based on the growth in other offerings.
When to Pull the Trigger?
• As a general rule of thumb, if a fund hasn't seen inflows for successive quarters and the trading volume stays low, there is a good chance the issuer is at least thinking about pulling the trigger on that ETF.
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