Filed Under: ,
Tickers in this Article: BVT, GNW, BSC, BVL, HIG, DRI, HP
The explosion of exchange traded funds (ETF) and exchange traded notes (ETN) trading on the stock market raises the question of whether we need a product to track every conceivable market niche out there. Perhaps some of these should never have been born to begin with. (Confused about what an ETF is? Read our Introduction To Exchange-Traded Funds, and get caught up.)

IN PICTURES: 20 Tools For Building Up Your Portfolio

There are now hundreds of these products tracking every conceivable sector, industry, group, style and market capitalization. One in particular is the Benjamin Graham Total Market Value ELEMENTS (NYSE:BVT) - an ETN that, according to the marketing literature, "seeks to identify businesses with strong, liquid balance sheets that trade at a discount to their implied intrinsic value."

The first problem with this product is liquidity. The ETN has been around a little less than a year and barely even trades. Its average volume over the last three months was 200 shares per day. In March 2009, the ETN didn't even trade for 14 consecutive business days.

Some portfolio choices seem odd when you consider when the stocks were selected. Darden Restaurants (NYSE:DRI) had its debt ratings downgraded by Standard & Poor's to BBB in March 2008. This was three months before it was selected for inclusion. Does a BBB balance sheet seem like it is "liquid and strong?" Another problematic position is Helmerich & Payne (NYSE:HP), a stock that was trading at $76 a share when it was chosen for the ETN. While leverage is not excessive for this company, it might have been a struggle to claim that this name was trading below its intrinsic value last summer, when there was an active debate in the investment community as to whether commodity prices were in an extended bubble.

Other positions have deteriorated so much since the ETN was issued that it might be better for the portfolio to be reconstituted more than once a year, which is what the marketing literature indicates is the current policy, and get rid of some of these before they hurt performance.

Genworth Financial (NYSE:GNW) is one of these that might have been jettisoned if the ETN had been more proactive. Genworth is down 90% from its 52-week high, and just disclosed that the company's request to be a savings and loan bank so it could be eligible for funds under the Troubled Asset Relief Program (TARP) was not accepted by the Office of Thrift Supervision. This certainly doesn't seem like a company with a strong balance sheet. (Learn about the components of the statement of financial position and how they relate to each other, check out Reading The Balance Sheet.)

Another holding that might raise some concern for a value investor is Hartford Financial Services Group Inc. (NYSE:HIG), a company being treated as suspect by the credit markets.

Potential Solution
Possibly the best course of action for the creators of this product would be to merge the Benjamin Graham Total Market Value ELEMENTS, with its two brethren – the Benjamin Graham Small Cap Value ELEMENTS ETNs (NYSE:BSC) and the Benjamin Graham Large Cap Value ELEMENTS ETNs (NYSE:BVL).

These two are similar to the total market value product (BVT), and the combined trading may be enough to sustain a single product.

The Bottom Line
There is an oversaturation of ETFs and ETNs in existence, representing every obscure market niche in our society. This leads to many instances where the products lack liquidity. The creators of these products should reevaluate the demand before registering new ones.

comments powered by Disqus

Trading Center