Beware: Zombie ETFs

Almost 200 exchange traded funds now trade in Australia, but not all have tickled investor appetite, with several plodding along like zombies, Rainmaker research shows.

Opening Financial Standard's annual Best Practice Forum on ETFs in Melbourne this morning, Rainmaker head of investment research John Dyall identified a number of ETFs open to Australian investors that can be considered "zombies".

"Zombie ETFs are those products that haven't reached sufficient levels of fund flow. In any developing market there are bound to be products that just never make it. If they stay listed, they may just drain resources from more viable products," Dyall said.

In identifying the products, Dyall set four criteria. The ETFs must be older than three years; hold less than $20 million in assets; have seen $2 million in net flows in the previous 12 months; and a traded value of less than $20 million over the previous 12 months.

As of March 2019, there were nine ETFs of 196 that met the Zombie criteria.

These include: BetaShares Agriculture (hedged), Betashares Euro, K2 Global Equities Fund, three ETF Securities products (physical palladium, platinum and precious metal), and three UBS IQ products (Japan ethical, USA ethical and research preference Australian share).

The funds under management across the nine funds range from $1.7 million to $7.4 million.

The Zombie ETF research did not consider performance.

Further, Australian ETFs' buy sell spreads and manager expense ratios have fallen in the six years to December 2018, which Dyall said stem from the network effect of more advisers using them.

"I want to emphasise that these so-called zombie funds are not necessarily bad funds. But from our analysis of the network effect, it's pretty clear that they will have a hard time providing the benefits of the network effect to investors," he said.

The research started in September 2018 and two of the ETFs that it recognised as Zombies then (ETFS S&P/ASX 100 and Aurora Dividend Income Trust) had shut by December 2018.?

Read more: RainmakerBetasharesJohn DyallASXETF SecuritiesK2Financial StandardUBS
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