The pace of ETF closures in 2013 has picked up recently, following Emerging Global Advisors’ decision to shutter a dozen funds in October, but that pace speaks more about an industry in growth mode than one in retreat.
So far in 2013, 53 exchange-traded products have found their way into the ETF graveyard, not too far off 2012’s 95 closures for the entire year. But a closer look at these funds point to rather expensive niche strategies that “fail to keep it simple,” IndexUniverse ETF analyst Spencer Bogart said.
“While 2012 had a comparable number of closures, they were primarily whole families of ETFs that closed (Russell ETFs and FocusShares), whereas 2013 is Darwin-esque in that some of the weak ETFs with meager assets, poor volume, and high expenses have been separated from the stronger offerings,” he added. “We’re actually just ‘trimming the fat’ from the market.”
These closures have come hand in hand with new product rollouts that are relatively slow compared with last year—so far in 2013, a total of 100 new ETFs have come to market compared with 141 new launches in the same year-earlier year-to-date period, according to data compiled by IndexUniverse.
It's worth noting that a bit more than a fifth of the nearly 1,500 U.S.-listed ETFs are at risk of closure, according to data produced by IndexUniverse’s ETF Analytics unit. But like the 12 funds Emerging Global is shuttering next month—which were on IU’s closure-risk list—most of those at-risk funds are rather small.
There’s no question that the market is consolidating, but that consolidation reflects growing investor discernment when it comes to picking and choosing ETFs. It in no way suggests trouble in paradise, S&P Capital IQ Director of ETF Research Todd Rosenbluth told IndexUniverse.
“At least 18 equities ETFs launched since 2012 have already gathered over $100 million in assets each,” he said. “Money is collectively moving into ETFs in 2013.“
“Investors are not waiting three years anymore to move into ETFs,” Rosenbluth noted. “They’re still looking for new investment ideas, but they’re going to be choosy.”
While not every strategy is going to find a following, the latest consolidation in the space comes at a time when the ETF industry, now in its 20th year, is certainly booming. Total assets under management recently crossed the $1.5 trillion threshold, and total number of funds is now roughly 1,500—the most to date.
In a way, the latest round of ETF closures by Emerging Global Advisors is a perfect example of that trend.
For starters, most of the ETF closures come from smaller ETF providers than from the big three—iShares, State Street Global Advisors and Vanguard—as the smaller players lack economies of scale to support smaller funds, Rosenbluth notes.
But more importantly, Emerging Global’s decision to shutter 12 funds in October—or roughly half of its entire lineup—reflects the company’s efforts to streamline its offerings by shedding strategies that have failed to attract assets.
But that’s not to say the company’s ETF model is hurting. On the contrary, the firm has actually seen its total assets under management grow to $1.32 billion in 2013, from about $1 billion at the end of last year, thanks in part to net inflows of $408 million year-to-date.
The 12 ETFs being shuttered represent less than 4 percent of EGShares’ total assets under management, with some of them having less than $10 million in assets. In general, funds with low assets face serious closure risk, as investors shun them due to their expected challenges with liquidity and wide spreads.
There are currently 341 ETFs—out of the nearly 1,500 funds on the market today—that show a “high risk” of closure, according to IndexUniverse ETF Analytics.
The bulk of those ETFs are funds that have less than $15 million in assets.
Two new China ETFs with a different approach have bright futures.
Making the most of an Ed Yardeni call on manufacturing with index funds.
WisdomTree's new currency-hedged Japan ETFs target sectors.
An MSCI-Barclays combo would create a mega-brand in indexing.