Add another item to the list of things low volatility is doing to the market: record amounts of ETF closures.
By the end of September, 42 exchange-traded funds are set to close, the most ever in a single month, according to data compiled by Bloomberg. Of those, 21 are leveraged or inverse funds, which tend to attract investors when prices are volatile but can fall out of favor when stocks are as calm as they have been all year.
One fund that’s set to close on Sept. 25 is Direxion’s Daily Homebuilders & Supplies Bear 3x ETF, ticker CLAW. The ETF, which makes leveraged bets that homebuilders’ stocks will fall, has been drained of assets this year as the sector has charted a steady upwards course. CLAW has shrunk to just $1.36 million in assets, down from $7.83 million at its peak in February 2016.
"For traders, volatility represents movement and therefore opportunity, but when there’s very little volatility, these products don’t get as much use," said Andy O’Rourke, chief marketing officer for Direxion.
Wall Street banks like Citigroup Inc. are blaming unusually calm markets for their poor trading results this quarter. Not even mounting tensions with North Korea or deadly U.S. hurricanes have been enough to trigger substantial volatility among stocks. On Sept. 18, CBOE’s Volatility Index, or VIX, fell below 10 for the first time since August.
Spaghetti Cannon
Milwaukee-based Direxion is shuttering 12 leveraged and inverse ETFs this month, according to a company release. Besides CLAW, there’s DULL, a leveraged ETF tracking the stocks of silver miners, and SICK, a fund that bets against health care shares.
"All ETFs tend to trade more when there’s more volatility, but definitely leveraged products," said Eric Balchunas, an analyst at Bloomberg Intelligence. "When those kind of volatile swings aren’t happening, it’s just not as fun of a game to play."
Of course, with leveraged and inverse ETFs, it can sometimes seem like the spaghetti cannon is set permanently at eleven, which means closures occur more often than usual. Among this month’s planned delistings is the Direxion Daily Cyber Security & IT Bull 2x Shares fund, ticker HAKK, with $5 million in assets.
Coincidentally or not, HAKK, which is two-times leveraged, was launched in September 2015, just a few months after the ETFMG Prime Cyber Security ETF, ticker HACK, an unleveraged fund tracking cybersecurity companies, ballooned to over $1 billion in assets. A massive computer breach at Sony Pictures Entertainment Inc. spurred investors to pour money into companies in the business of thwarting such attacks.