Herbalife’s FTC Flap Highlights Advantages of ETFs
March 13th, 2014 at 8:00am by Tom Lydon
Shares of nutrition and weight loss company Herbalife (NYSE: HLF) slid 7.4% on 4.5 times the average daily volume Wednesday on news the Federal Trade Commission has opened a formal investigation into the company.
Herbalife said it will comply with the investigation, but that did not stop the stock from being halted for news pending during Wednesday’s session. Nor did Herbalife’s eagerness to be of assistance to the FTC prevent the shares from, at one point during the day, trading around $55. Overall, Herbalife was a day traders dream come true Wednesday trading above $69 only to fall to around $55 only to close at $60.57.
Herbalife’s Wednesday tumble, in some respects, highlights the advantages of exchange traded funds. To be fair, Herbalife is not a major component in many ETFs, but it is a top-10 holding in the First Trust Consumer Staples AlphaDEX Fund (NYSEArca: FXG). In fact, FXG is the only ETF that features Herbalife among its top-10 holdings, according to S&P Capital IQ data.
The stock was FXG’s ninth-largest holding at a weight of 9.83% as of March 11, according to First Trust data. No stock accounts for more than 5.92% of the $819.3 million FXG’s weight.
While Herbalife was halted, FXG was open for business , allowing traders to transact in the fund and at size. No, Herbalife’s presence in FXG is not large enough to truly determine the ETF’s fortunes in either direction. However, the ETF behaved as expected Wednesday, absorbing unusual volume in a short time frame while damping investors’ single-stock risk.[Google Gets Bigger in Plenty of ETFs]
If there is a knock on FXG’s Wednesday action it is that the ETF lagged rival consumer staples funds, but the reason for that is some traditional cap-weighted staples ETFs, such as the Consumer Staples Select Sector SPDR (NYSEArca: XLP), do not hold Herbalife.
When the dust settled on Wednesday, FXG close higher by a penny on volume that was more than double the double daily average. That is not too shabby considering one of the ETF’s top-10 holdings was taken to the woodshed.
First Trust Consumer Staples AlphaDEX Fund
ETF Trends editorial team contributed to this post.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.