Definition
A Zombie ETF (Exchange-Traded Fund) refers to an underperforming ETF that has low trading volume, limited investor interest, and minimal assets under management. These funds often struggle to generate significant returns and might be at risk of liquidation due to their lack of profitability. Investors should be cautious when considering investing in Zombie ETFs, as they may not provide desired diversification or risk-adjusted returns.
Phonetic
The phonetic pronunciation of the keyword “Zombie ETF” is:Zombie: /ˈzɒmˌbi/ETF: /ˌiːˈtiːˈɛf/Here, we have used the International Phonetic Alphabet (IPA) to write out pronunciation.
Key Takeaways
- Zombie ETFs are exchange-traded funds that have a low trading volume and/or assets under management, which may lead to reduced liquidity for investors.
- These ETFs tend to underperform in the market and are more likely to be closed by the issuers, thus adding an element of risk for those invested in them.
- Investors are generally advised to avoid Zombie ETFs and consider alternatives that have higher liquidity, better track records, and more stable assets under management.
Importance
The term “Zombie ETF” is important in the business and finance domain as it refers to an Exchange Traded Fund (ETF) that is experiencing underperformance, low trading volume, and lack of investor interest, making its existence questionable. These ETFs are typically characterized by diminishing assets under management (AUM) and low returns, thus leading to higher expense ratios. The significance of a Zombie ETF lies in its potential risk for investors, who may face difficulties when trying to sell their shares due to reduced liquidity. Furthermore, they also serve as a cautionary tale for fund managers looking to launch new ETFs, emphasizing the importance of building a unique value proposition and garnering investor interest to avoid a similar underwhelming fate.
Explanation
Zombie ETFs, often known as “orphaned ETFs” or “dead ETFs,” typically serve a dual purpose in the financial markets. Firstly, they cater to niche areas and specialized investment strategies not serviced by primary market index funds or well-established ETFs. These exchange-traded funds aim to provide investors with unique exposure to alternative asset classes or sectors that are underrepresented in the more popular and widely-held ETFs. In essence, Zombie ETFs offer an opportunity for discerning investors to diversify their portfolios, capitalize on potentially untapped market spaces, and potentially earn higher-than-average returns. Secondly, Zombie ETFs serve as valuable tools for institutional investors and asset managers who are keen on exploiting low liquidity and higher spreads that are characteristic of these ETFs. Institutions with sizeable holdings can take advantage of these inefficiencies to execute large orders without significantly impacting the market price. Furthermore, Zombie ETFs can act as vehicles for tactical asset allocation, allowing fund managers to time their exposure to sectors and themes that they believe will perform better in specific market conditions. This ability to nimbly navigate the market landscape has the potential to enhance overall portfolio performance and can be an appealing attribute of Zombie ETFs for more sophisticated investors.
Examples
A Zombie ETF, or Zombie Exchange-Traded Fund, is an ETF with low trading volume, assets under management (AUM), and liquidity, which can result in high trading costs and lackluster returns. These are often called “languishing” or “struggling” ETFs.Here are three real-world examples of Zombie ETFs that were liquidated or merged due to lack of interest or poor performance: 1. VelocityShares 3x Long Crude Oil ETN (UWT): This triple-leveraged ETF, which aimed to provide investors with exposure to oil prices, was liquidated in April 2020 due to unprecedented fluctuations in the oil markets. The ETF had experienced low trading volume and assets under management, making it a prime example of a Zombie ETF. 2. WisdomTree Asia Local Debt Fund (ALD): This ETF, which aimed to provide investors with exposure to local currency bonds in Asia’s emerging markets, was liquidated in June 2018. The ETF had struggled to gather assets and saw limited trading volume, making it an example of a Zombie ETF that ultimately did not survive in the market. 3. Global X SuperDividend U.S. ETF (DIV): This ETF’s goal was to replicate the performance of the highest dividend-yielding securities in the United States. However, it faced challenges with low trading volume and assets under management, causing it to shut down in September 2020. It is essential for investors to carefully evaluate ETFs and their characteristics before investing, as Zombie ETFs might lead to poor returns or even the risk of liquidation.
Frequently Asked Questions(FAQ)
What is a Zombie ETF?
What causes an ETF to become a Zombie ETF?
What are the risks associated with Zombie ETFs?
How can I identify a Zombie ETF?
How can investors avoid the risks associated with Zombie ETFs?
Can a Zombie ETF recover and become successful?
What happens if a Zombie ETF closes down?
Are there any alternatives to Zombie ETFs for investors interested in certain niches?
Related Finance Terms
- Financial Distress
- Low Trading Volume
- Underperforming Assets
- Exchange-Traded Fund(ETF)
- Liquidation Risk
Sources for More Information
