What is a 'Zombie ETF'

A zombie ETF refers to exchange traded funds that are seeing little trading volume or increased investment. These funds are described as zombies because they aren't growing and are likely to be cut by the issuer. In other words, the ETF may be dead already and just not know it. ETFs are like many financial instruments, in that a lack of new capital flowing in and/or trading volume in the shares can be a bad sign. The liquidity concerns with the low trading volume scares investors away even as the costs of administering a fund that isn't attracting new capital inflows erodes profitability for the issuing firm.


Zombie ETFs are not the only zombies in the world of finance. There are zombie banks, zombie debt and zombie titles. In finance, "zombie" is generally used to describe situations where capital is tied up without a clear path to resolution. Zombie ETFs also fall into this type of description in that the issuer has a fund that isn’t attracting new funds and isn’t seeing its shares trade in any significant amount. So the issuer is left holding a fund that costs money to maintain but has little prospect for growth. In this situation, it is usually only a matter of time before the issuer shuts down the ETF in question.

The Rise of Zombie ETFs

The main reason zombie ETFs are on the rise is that there are more ETFs being issued every year. The broad, popular ETFs like the SPDR S&P 500 ETF have filled much of the market demand, but there are new areas opening up in hyper-focused ETFs. The risk with this kind of experimentation is, of course, that a fund just doesn’t catch on with investors and joins the growing ranks of Zombie ETFs. The success of new ETFs isn’t even measured by returns, however, as some zombie ETFs have been shut down despite posting strong returns. The issue is whether a fund fits a strategic need in enough investors' portfolios. A targeted ETF can act as a market hedge or help diversify a portfolio, but it still needs to have a broad enough appeal that it is profitable for the company managing it.

From Zombie ETF to Dead ETF

Of course, there is no universal guideline on when a zombie ETF will be put down. Some issuers give a generous timeline for a new fund to season and start generating interest, while others are able to make quick culls based on the growth in other offerings. Exchanges have also played a role in the proliferation of ETFs and thus the rise of zombies. Exchanges are competing for new listings to add to an industry that has been a growth driver when other financial issues have dried up, and they aren't above incentives for new ETF listings. This can encourage issuers to let a zombie ETF linger longer than they would otherwise. If a fund hasn’t seen inflows for successive quarters and the trading volume is low, however, there is a good chance that the issuer has it in its sights, even if they aren’t quite ready to pull the trigger.

  1. Zombie Foreclosure

    Zombie foreclosure refers to the situation caused when a homeowner ...
  2. Dividend ETF

    A dividend ETF is an exchange-traded fund designed to invest ...
  3. International ETF

    An international exchange traded fund (ETF) is any ETF that invests ...
  4. PowerShares

    PowerShares are the branded name of a family of domestic and ...
  5. Japan ETF

    A Japan ETF is a type of exchange-traded fund that invests in ...
  6. Oil Services Industry ETF

    Oil Services Industry exchange-traded fund (ETF) invests in companies ...
Related Articles
  1. Investing

    Don't Get Trapped in a Zombie Foreclosure

    Understand how foreclosures work and you can avoid the disastrous consequences of having a zombie foreclosure.
  2. Investing

    A Look At the Growth Of the ETF Industry

    Explore the phenomenal growth rate of the ETF industry, and learn some of the principal reasons why ETFs are projected to continue to grow at a rapid pace.
  3. Personal Finance

    How To Beat Off A Zombie Debt Collector

    Sounds like a bad horror movie, but it really could happen to you. Here's how to identify zombie debt and send collectors back to the dead-debt graveyard.
  4. Investing

    4 Things to Know Before Choosing an ETF

    ETFs are a low-cost way to get exposure to different markets. But they're not all the same. Investors should research the following key information regarding the ETF before buying it.
  5. Investing

    5 ETFs Flaws You Shouldn't Overlook

    Despite their popularity, exchange-traded funds, or ETFs, have some drawbacks that investors should know about.
  6. Financial Advisor

    What All Investors Should Know About ETFs

    ETFs have become popular for their versatility and variety, but that doesn't mean they're always the right choice and that they're all created equal.
  7. Investing

    The right time to change from mutual funds to ETFs

    Find out how to determine when it's the right time for you to switch from mutual funds to ETFs, including the benefits of ETFs and who they are best for.
  8. Investing

    Active vs. Passive ETF Investing

    Active or passive ETF investing? Find out which one is for you.
  1. Should I invest in ETFs or index funds?

    Learn the advantages to investing in exchange-traded funds, or ETFs, and index funds, and decide whether to include them ... Read Answer >>
  2. Who's in charge of managing exchange-traded funds?

    An exchange-traded fund (ETF) is a security that tracks an index but has the flexibility of trading like a stock. Just like ... Read Answer >>
Trading Center