ETF Closings: Not To Worry
October 25, 2012
Any excessive worry about the accelerating pace of ETF closures in the past year is off the mark.
A record number of ETFs have been closing in the past few months, but investors needn’t be alarmed.
It easy to think that perhaps they should be concerned considering how funds and ETNs alike seem to be dropping like flies. In the past week alone, QuantShares and WisdomTree have announced shutterings that have added to the rapid-fire end of a total of 40 ETFs FocusShares and Russell Investments.
Here we consider $50 million as a threshold for determining a low likelihood of closure, though I’ve heard numbers ranging from $30 million to $100 million.
While there is no exact science in determining at what asset level an issuer won’t close a fund, the important thing to remember is a fund making money for an issuer is unlikely to close.
In the end, all the hullabaloo on the topic is overblown, especially when put into perspective.
It’s true that in 2012 so far, we have seen 91 funds close, the largest number of ETF closures in a single year on record. While this may seem a staggering number, it’s actually not. The year started with 1,372 funds, meaning the closure rate so far for 2012 is 6.6 percent.
Keep in mind that the year isn’t over and, while fund launches are down, we have still seen 157 funds launched this year, with many more on the horizon.
By comparison, 2008—which saw 56 funds closed throughout the year—on a percentage basis saw 8.3 percent of funds closed.
When you consider the relatively nascent nature of the ETF landscape in 2008, the number of shutterings is much more staggering than the current slew of closures. After all, the recent closures stem largely from a saturation of available equity exposure as well as from unpopular alternative ETF strategies.
Keep in mind also that the mutual fund industry doesn’t fare much better.
Let’s look at the survivorship statistics from the most recent SPIVA Scorecard, a rolling 12-month data series using June 30, 2012 as the cutoff date. The SPIVA data, which compare the performance of active equity and fixed-income mutual funds to their relevant passive index returns, show that there were about 227 fund closures, or 4.5 percent of the sampled universe, in the one-year period.
But when you consider that the rankings in the SPIVA report don’t include esoteric alternative strategies that make up a chunk of ETF fund closures, the closure numbers aren’t that far apart.
It’s also possible that many issuers are cleaning house largely due to the high-profile closures of Russell and FocusShares to avoid unnecessary headlines about fund closure down the road.
I recognize there are timing mismatches with the SPIVA results and that ETFs are predominantly index-tracking funds, while SPIVA focuses solely on active mutual funds.
The core point remains that closures, while not pleasant, are simply a part of the realities of investing and, at the end of the day, are a healthy part of the industry.
Contact Gene Koyfman at firstname.lastname@example.org. Follow Gene on Twitter @GeneKoyfman.