Not All Thinly Traded ETFs are Castoffs

ETF closures are on the rise. In August alone, Direxion has announced the closure of nine leveraged products while Scottrade said it will liquidate the entire suite of 15 FocusShares ETFs.

With those announcements, ETF closures in 2012 will easily outpace the rate seen last year and that does not even include news from Russell Investments, which said it is reviewing its ETF operations. Russell ETFs will continue trading, but the firm said it is scaling back its dedicated ETF team.

Usually, an ETF evaporates because of low trading volume and an inability to attract sufficient assets. Assets and volume do not tell the true story of an ETF's value or potential to generate alpha. However, these metrics are used over and over again by investors, pros and retail alike, in determining an ETF's ability to generate returns. That is odd when considering it has been documented lightly traded ETFs can outperform more heavily traded issues.

Here are a few examples of what investors are missing out on by continuing to focus on assets and volume as the only determinants of an ETF's worth.

First Trust Latin America AlphaDEX Fund (NYSE:FLN) The First Trust Latin America AlphaDEX Fund debuted in April 2011 and has not emerged as a candidate to win any ETF popularity contests since then. FLN has just under $3.8 million in assets under management and 30-day average volume of about 440 shares.

That is nothing compared to daily average for the iShares S&P Latin America 40 Index Fund (NYSE:ILF). ILF trades over 850,000 shares per day. Both funds offer multi-country exposure to Latin America with heavy weights to Brazil and Mexico, but in year-to-date and over the past month, FLN clearly beats ILF.

Global X NASDAQ 500 ETF (NASDAQ:QQQV) Home to about 500 stocks, Global X NASDAQ 500 ETF is not a true rival to a fund like the PowerShares QQQ (NASDAQ:QQQ), though QQQV does share something in common with the Nasdaq 100 ETF: A large weight to Apple (NASDAQ:AAPL). QQQV allocates 15.1 percent of its weight to the largest U.S. company by market value.

While many of QQQV's constituents are heavily traded, the ETF itself is not with average daily turnover of less than 400 shares. That number belies the most important fact about the ETF: Performance. QQQV is up 18.5 percent year-to-date.

Market Vectors LatAm Aggregate Bond ETF (NYSE:BONO) By comparison to the rest of this list, BONO is heavily traded with average daily turnover of 5,600 shares. That number is by no means great and it shows investors are overlooking BONO's more important statistics. For example, BONO has jumped 6.2 percent year-to-date.

Of course, BONO's 30-day SEC yield of 5.5 percent should not be ignored, either. Nor should the potential of emerging markets bonds ETFs, particularly those with exposure to Mexico, which BONO has.

BONO's bottom line: By focusing on the superficial statistics of assets and volume, investors have missed out on not only performance, but yield as well.

For more on low volume ETFs, click here.