Not too long ago, someone sent me an advertisement for an exchange-traded fund (ETF) that tracks the global airline industry. The ticker for the ETF is very cute: JETS.
Personally, I think an index that tracks the airlines industry is nuts. Although it can’t be attributed to anyone specifically, it’s been said that the airline industry, in its entire history, has never made any money.
I don’t have the data to say whether this is true or not, although airlines are a notoriously bad business due to their capital intensity, cut-throat competition, the suppliers are a duopoly (Airbus and Boeing), extreme regulatory regime and have volatile input costs in the form of volatile oil.
I’m sure that the backtest for the underlying index looks fine (although I didn’t even bother to look), but I find it interesting that the issuing firm would make this their first offering since two other airline ETFs have already liquidated due to lack of investor interest. One even had a really clever ticker: FAA.
As silly as an airline ETF may be, the launch of JETS is emblematic of a larger story about the proliferation of ETFs in general. When we launched Acropolis nearly 13 years ago, ETFs were relatively new products and there weren’t a ton of offerings.
For example, we couldn’t get emerging markets exposure through an ETF. Even more amazing, there weren’t any bond ETFs. Now, there are 92 ETFs that track emerging markets, 284 bond ETFs and, somewhat shockingly, a choice of 22 emerging market bond ETFs. That’s really amazing when you think about it.
As early adopters of ETFs, we welcome true innovation. We like the low cost, tax friendly structure of ETFs and love seeing competition between providers. Several of the products that we use have expense ratios of less than 0.10 percent thanks to price wars among issuing companies.
The silly ETFs are simply a byproduct of innovation and competition. It’s impossible to compete with Vanguard or iShares with another S&P 500 index fund, so companies have to be creative and offer something that the big players may not.
When it works, it can be extremely profitable. One ETF provider created a fund that tracked Japanese stocks and hedged the currency exposure.
The fund didn’t do much for a few years and wasn’t overly popular, but when the Japanese central bank started their bond buying program, stocks took off while the currency fell and the ETF took off and revenue at the firm ballooned.
For every hit like that, though, there are dozens of failures. I don’t have data on the total number of liquidations, but one of my favorite websites to look through every now and again is ETF Deathwatch, which you can see by clicking here.
This is a list of funds that this company believes won’t make it because they haven’t caught on with investors. The number one ETF on the list, for example, has been out for nearly five years and only has $13 million in assets under management.
It’s easy to see why, since the fund has lost -3.87 per year since inception. The management fees are 1.35 percent, which means that the revenue for this product is $175,000. It’s hard to know why they keep the doors open on this fund.
The list is full of silly ETFs. My favorite is NASH, an ETF that tracks stocks that are based on Nashville. Others funny ones include NYCC, a fund that buys stocks that are 100 years old and TOFR, which buys stocks that are splitting – an idea that has absolutely no basis in theory whatsoever (but a clever ticker nonetheless).
We continue to look at new product launches to see if there is anything interesting and useful, although we like to let things season for a few years in the market to see how they trade and really think about whether they make sense or not.
And of course, if there’s one worth a chuckle, we’ll send it around the office to get a laugh now and again.