What Happens When ETFs Return to Their Debut Prices?
It has been said hundreds of times, probably more, that new ETFs should not be treated like hot IPOs for individual stocks. What that means is investors don't need to be involved with a new ETF on its first day of trading.
While there's no hard and fast set of guidelines for exactly when the time is right to become involved with a new ETF or ETN, in most cases it's safe to let the first week of trading pass without getting involved. In many instances, it's advisable to let a new ETF age for a month or longer before pulling the trigger on a buy order.
That advice highlights a stark difference between new exchanged-traded products and IPOs for individual stocks, but there is one similarity between the two asset classes: The usefulness of the debut price.
Applying the theory that once-hot IPOs that return to the price at which the shares debuted often leads to increased selling pressure, we screened for ETFs that, at some point in their respective life spans, have fallen back to their launch prices. What we were hoping to discover is whether or not an ETF's return to its debut price is an efficacious short signal or if that area acts as some kind of mental support.
For now, we've only included five ETFs. Our screen excluded inverse and leveraged products, ETFs and ETNs that have undergone reverse splits and includes only funds that are at least a year old.
iShares MSCI Italy Index Fund (NYSE: EWI) The lone Italy-specific ETF debuted in March 1996 around $13.50, but it took more than five years for the ETF to trade below its debut and even then the flirtation was brief. EWI repeated the offense again during the global financial crisis in 2008-2009, though plenty of ETFs did the same, so we'll be nice and give EWI a pass.
However, we won't give EWI a pass for its most recent break of $13.50, which occurred in March. It might be the last time this ETF breaks its introduction price because at $11.25 and given the Euro Zone's debt woes, it could take a miracle for EWI to see its debut price anytime soon.
Market Vectors Junior Gold Miners ETF (NYSE: GDXJ) Traders that don't live under a rock know that gold miners have dramatically underperformed gold futures for more than a year now and that situation shows no signs of reversing anytime soon. GDXJ, which will turn three in November, is still home to almost $2 billion in AUM, but another statistic needs to be highlighted.
That is that while most folks are talking about the ETF making new 52-week lows, the reality is these new lows are ALL-TIME lows. GDXJ debuted at $25 and the first time it traded below there, it rallied. The second time, late last year, it rallied. The third time in March was the ominous charm as GDXJ is now flirting with $20.
Vanguard MSCI Europe ETF (NYSE: VGK) The Vanguard MSCI Europe ETF was priced at $50 when it debuted in March 2005, a level that has been violated several times for myriad reasons, but the ETF has also found a way to reclaim that debut price. VGK is home to plenty of European-based companies that qualify as blue chip but that doesn't change the fact that they're still European companies. It has been 10 months since VGK last resided above $50.
iShares MSCI Thailand Investable Market Index Fund (NYSE: THD) We're making an exception with one of the best emerging markets ETFs on the market. THD debuted at $50 in the late part of the first quarter of 2008. Let's just say there are better times for an emerging markets ETF to have come to market because it took THD 17 months to get back above $50.
Since the market bottom in 2009, THD has been one of the best ETFs on the market, emerging markets or otherwise and while it has taken its lumps in the past couple of weeks, the long-term outlook for this ETF and the country it tracks are bright.
Market Vectors Gold Miners ETF (NYSE: GDX) The Market Vectors Gold Miners ETF hasn't traversed its 2006 debut price of around $38 since the commodities bubble burst in 2008. That sent the ETF tumbling below $18. It's a different world today, so a decline that substantial probably isn't the cards for GDX.
However, it must be noted GDX did touch a new 52-week low earlier this week. Combine that with the decline in gold futures and it's not unrealistic to see the selling pressure on GDX intensify if it breaks $38 again.
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