Herbalife’s FTC Flap Highlights Advantages of ETFs

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]