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iPath Natural Gas ETN Is A Broken Product

ETF and ETN investors should avoid broken products. I have repeated this caution numerous times over the years. Upon hearing this warning, most investors want to know what a broken product is. Once they understand the definition, they quickly grasp the danger. ETFs and ETNs are unique securities. The primary feature that differentiates them from other investment vehicles is the ability to create and redeem shares, typically through an in-kind exchange process. Another key feature is the publishing of the underlying portfolio’s value throughout the trading day. The two features combined allow market makers to keep the trading price very close to the value (often called the Intraday Value or the iNAV). This is the “promise” behind ETFs and ETNs, and investors expect these products to live up to it. However, sometimes the share creation mechanism is suspended or terminated for a given product, and that is when it becomes a broken product. Without a viable share creation process, an ETF or ETN can trade like a closed-end fund with price premiums. The typical retail investor does not have an easy way of knowing if a product is broken or not, and that is where the danger lies. It could be trading at a substantial premium, a premium that could disappear instantly. This is not just a theoretical problem; it is very real and happening today. You are probably aware that crude oil prices have been falling for a number of months. More recently, natural gas prices plunged. ETFs and ETNs tracking natural gas fell right along with the underlying commodity. Last week, the United States Natural Gas Fund (NYSEARCA: UNG ) dropped 12.5%. The leveraged ProShares Ultra Bloomberg Natural Gas ETF (NYSEARCA: BOIL ) was whacked for a 22.6% loss. However, the iPath DJ-UBS Natural Gas Total Return Sub-Index ETN (NYSEARCA: GAZ ), an unleveraged product tracking the same index as BOIL, gained 5.9%. The reason for this is because GAZ is a broken product. On August 21, 2009, Barclays “temporarily suspended” the creation unit process for GAZ . More than five years later it is still suspended, straining the credibility of the word temporarily. I’m willing to bet most investors are unaware GAZ is broken. Without the ability to create and redeem units of GAZ, it is impossible for market makers to keep the trading price near the net asset value (“NAV”). The NAV of GAZ went from $1.9182 to $1.5874 per unit last week, a plunge of 17.2%. The price went the other way, increasing from $2.02 to $2.14. GAZ started the week trading at a 5.3% premium and closed with a 34.8% premium. The premium narrowed slightly earlier this week, but it was more than 36% at the close on Wednesday. Anyone buying GAZ today is far more than it is worth. This is not a traditional liquidity problem, as GAZ has averaged more than 100,000 shares a day recently. This high volume suggests that many participants are unaware of its broken product status. One day, regulators may require investors be informed they are buying a broken product by requiring a ticker symbol suffix or some other means. Until then, be careful out there, and don’t get caught owning a broken product when the premium disappears . Disclosure covering writer, editor, and publisher: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.

TrimTabs Plans 2 Free-Cash-Flow ETFs

TrimTabs ETF Trust has recently filed a post-effective amendment for two ETFs – one focusing on the domestic market and the other on international markets. The funds – TrimTabs International Free-Cash-Flow ETF and TrimTabs U.S. Free-Cash-Flow ETF – are expected to trade under the tickers FCFI and FCFD following their launch. Below, we have highlighted some of the details about the ETFs for investors seeking to know more about these in-registration funds: FCFI in Focus As per the SEC filing , the proposed passively managed ETF looks to provide exposure to international companies poised for rapid growth by tracking the performance of the TrimTabs International Free-Cash-Flow Index before fees and expenses. For this purpose, the index focuses on companies with high free cash flow yield, including REITs. Free cash flow here refers to the total cash generated by the company after spending the money required to maintain or expand its operations, while free cash flow yield is the ratio of a company’s free cash flow to its market capitalization. The index follows an equal weighted strategy which ensures a well-diversified portfolio. Moreover, the index seeks to provide exposure to 10 countries, including Australia, Canada, China, France, Germany, Japan, Korea, the Netherlands, Switzerland and the U.K. The fund will charge 69 basis points as fees. FCFD in Focus The proposed fund looks to track the performance of the TrimTabs U.S. Free-Cash-Flow Index, before fees and expenses. The passively managed fund focuses solely on U.S. companies, including REITs, having a high free cash flow yield. FCFD in short follows the same strategy as FCFI and also charges the same fees, but with a domestic focus. How Might it Fit in a Portfolio? Free cash flow is one of the important tools to measure the performance of a company. Usually most investors focus on fundamental indicators such as the price-to-earnings ratio (P/E), book value, price-to-book (P/B) and the PEG ratio to select companies with strong fundamentals. They often ignore free cash flow measures. However, the free cash flow yield offers a better representation of the company’s performance and in most cases give a fairer picture of the company than other fundamental measures. FCFI and FCFD, which focus on companies with high cash flow yield, are expected to hold some of the best performing international and domestic companies, respectively. ETF Competition Presently, there aren’t many funds focusing on this space. However, we have two funds from Cambria – one focused on the domestic space and the other on the international front – providing exposure to companies that generate high free cash flow and in turn look to return these to shareholders in the form of cash dividends, share repurchases, or by reducing their leverage. Cambria Shareholder Yield ETF (NYSEARCA: SYLD ) with an asset base of $218 million is based on the research that free cash flow is a key predictor of a company’s strength. This product invests in companies that show strong characteristics in returning free cash flow to their shareholders by way of cash dividends, share repurchases, or by reducing their leverage. The actively managed fund has a diversified portfolio of 104 stocks and charges 59 basis points as fees. Cambria Foreign Shareholder Yield ETF (NYSEARCA: FYLD ) on the other hand also works on the same proposition as SYLD, but focuses on stocks from foreign developed countries. The fund manages an asset base of $62.4 million and includes companies with the best combination of dividend payments and net stock buybacks. The fund charges the same fee as SYLD. Thus, FCFI and FCFD, if launched, have a fair chance of building assets for themselves, given the lack of competition in the space.

3 Worst Global ETF Investments Of 2014

2014 was a relatively sluggish year for international markets. While the U.S. indices were setting new all-time highs seemingly year round, most international economies were reeling under global pressures. Per MSCI, the World ex-USA index is down 5.9% so far this year, while countries within the European Monetary Union ( EMU ) have turned out to be one of the most beaten down markets, having shed about 8.7% in the time frame. Emerging nations were also no better having retreated about 4.4% YTD. These were in stark contrast to the 11.9% gain seen in North America. Deflationary worries in Europe, apparent failure of Abenomics in Japan, prolonged slowdown in the world’s second largest economy China, massive crash in crude and the ensuing currency woes (as well as the broader commodity market rout) rattled investors’ faith over international investing in 2014. As the year is drawing to a close, we handpick 3 global ETFs which have severely underperformed in 2014. These ETFs should be closely watched if the macroeconomic backdrop takes longer to turn around in the New Year. AdvisorShares Accuvest Global Opportunities ETF (NYSEARCA: ACCU ) The ETF is a good choice for long-term investors seeking a broad global exposure. The fund doesn’t track any particular index and instead looks to identify countries that may outperform other equity markets on the world stage based a top-down method that considers 40 different factors. The product is structured as a fund-of-funds and holds other ETFs in its basket in order to give investors global exposure. This AdvisorShares fund is unpopular and illiquid with just $4.2 million of assets and about 20,000 shares of average daily trading volume. While low trading volume can result in higher trading costs, the use of the fund-of-funds technique and the active management strategy render the fund quite expensive with an expense ratio of 1.25%. Presently, the iShares MSCI China ETF (NYSEARCA: MCHI ) (19.69%), the iShares MSCI Sweden ETF (NYSEARCA: EWD ) (17.90%) and the iShares MSCI Thailand Capped ETF (NYSEARCA: THD ) (14.78%) occupy the top three spots. The fund is heavy on emerging Asia (33%), Developed Europe (28%) and North America (25%). Sector-wise, financials takes the top spot with a 33.8% allocation, followed by 15.7% exposure to information technology and a 10.1% allocation to industrials. The fund lost the most in the global equities space in 2014, slumping about 15.3%. AdvisorShares Athena International Bear ETF (NYSEARCA: HDGI ) This one too is an active ETF from the same issuer, AdvisorShares. The ETF seeks to generate capital appreciation through short sales of international equities. Stocks are selected using the portfolio manager’s patented behavioral research, which measures manager behavior, strategy consistency and conviction. The research also evaluates stocks to be placed in top and bottom relative weight positions within the equity universe. Additionally, the portfolio manager also utilizes equity manager and investor behavior factors to determine the most attractive markets and capitalization ranges for their short choices. Once this is done, the stocks that rank the lowest from the conviction holdings list receive allocations in the fund, based on market cap. This intensive investigation results in a higher annual fee of 1.50%. The product is fairly overlooked by investors as depicted by its AUM of only $1 million and average daily volume of about 5,000 shares. The ETF was down 15% in the 2014 time frame. WisdomTree Commodity Country Equity ETF (NYSEARCA: CCXE ) Commodities had a rough stretch this year due to a stronger dollar, favorable weather and soft demand owing to a patchy global recovery. The product is a high-yield option looking to track the stock market performances of dividend-paying companies hailing from commodity-rich nations. The product tracks the WisdomTree Commodity Country Equity Index and results in a portfolio of 161 securities with an expense ratio of 58 basis points a year. This ETF assigns 26.3% of its asset base to financial stocks followed by 20.3% in energy, 15.9% in telecom and 11.9% in material. As the name suggests, the fund looks to invest in resource-dominant nations, including New Zealand, Canada, Norway, Australia, Chile, Brazil and Russia. Regional weights vary in the range of 10.95-14.76%. The fund appears to be spread out among companies, as no firm accounts for more than 4.97% in the fund. StatoilHydro ASA (NYSE: STO ), Telecom Corp of New Zealand Ltd, and Ambev S.A. (NYSE: ABEV ) take the top three positions in the fund with asset investment of 4.97%, 3.68% and 2.73%, respectively. The fund was down 11.2% on the year.