When FocusShares decided to shutter its four existing tactical exchange-traded funds this week, it was not a signal that the company was bailing out of the ETF business, according to the company.

FocusShares Chief Executive Erik Liik said in an interview Wednesday, a day after announcing the shutterings, that executives were discarding the tactical ETF approach. That strategy included niche plays on homebuilding and Wal-Mart supplier companies through index ETFs.

FocusShares says it's making the moves so it can devote its resources to the introduction of what Liik called "solutions-based" ETFs.

FocusShares has a series of tactical ETFs, in addition to the four being liquidated on Oct. 20, that have been in registration with the Securities and Exchange Commission.

However, Liik said those will not launch any time during the next six to 12 months, if ever, as the company transitions to what it believes will be a more scalable ETF business.

The existing tactical ETFs and those in registration had been designed for active traders, who were early adopters of the ETF structure. Liik says those active traders have not made enough use of the company's tactical funds.

The funds have only attracted $17 million in assets since their launch approximately nine months ago, and had net outflows in September of $5 million (see related story).

Tactical Plays No Guarantee 

In today's market, a niche firm cannot hang around waiting for assets to amass over the long term, Liik says. Furthermore, during a market in which conditions may be getting even worse before a recovery, there is no reason to believe that tactical plays on the U.S. housing market or U.S. consumer spending will generate significant short-term interest, certainly not enough interest to keep the tactical ETFs afloat until a better part of the business cycle.

The four shuttered ETFs also include plays on "sin" industries and homeland security.

Instead, FocusShares is preparing a filing for late-November of a suite of solutions-based ETFs designed for the retail and advisor marketplaces; to begin with, approximately a half dozen new funds.

In effect, FocusShares is not only changing its product approach from tactical strategies to solutions-based strategies, buts its distribution focus from the trader universe to the advisor and retail investor.

Liik says he hopes the new suite of ETFs can launch in the first quarter of 2009.

He was reluctant to provide details on the solutions-based ETFs, since they have not been registered yet.

But he says the idea is to shift from the idea of offering ETFs as an investment tool to the idea of offering ETFs as an investment solution, without disintermediating the advisor.

Liik says most ETFs today fit into the "tools" definition, and are used as individual tools in aggregate. Therefore, the company hopes to carve out a niche providing a more comprehensive approach to advisors and investors.

Performance has not been great in the existing ETFs due to shuttering, and the "sin" ETF has had a terrible year.

On a relative basis, though, the soon-to-be-closed ETFs have done no worse than the broad equities market, and in some cases, have outperformed. Consider:

• The ISE SINdex Fund (NYSEArca: PUF) is down 40% year-to-date, and 20% in the past three months, through Sept. 30, according to Morningstar data.

• The ISE-CCM Homeland Security ETF (NYSEArca: MYP) is down 18% for the year, and 15% for the past three months, but that still beats the performance of the S&P 500.

FocusShares couldn't even develop any traction for the ETFs whose performance has beaten the market by a wide swath. The ISE Homebuilders Index ETF (NYSEArca: SAW) is down 20% year-to-date, but actually up 4.3% in the past three months, outperformance of more than 24% of its peers.

The ISE-Revere Wal-Mart Suppliers Index ETF (NYSEArca: WSI) is the best of the pack year-to-date, down 12%, and down only 6.7% in the past three months. That is more than an 18% outperformance of the S&P year-to-date.

Just A Distraction 

"There's just no economy to support those [tactical] products now, so investing in the long-term future is a better approach for us," Liik said, adding that the tactical funds, even the unlaunched ones, would just be a distraction to the company now.

With the investor, and the population more generally risk-averse right now, ETF solutions to addressing those concerns can tap an unmet need among advisors and investors, he added. "We believe these solutions-based ETFs will be more scalable than the tactical funds," Liik said.

For the tactical funds, FocusShares used a series of indexes licensed from the International Securities Exchange (ISE). Liik said no final determination has been made on index partners for the new portfolios, and that is one of the reasons why the filing for the new funds may not occur until Nov. 30.

The development of a solutions-based approach, and the competitive nature of product innovation in the ETF space, has also led the company to hire its first in-house general counsel. FocusShares has tapped George Marootian—who has spent 30 years at Schering-Plough, the last 10 years as assistant secretary to the big pharma company—to the new general counsel position. Notably, Marootian has extensive experience in patent law, which could prove important to the ETF provider in terms of protecting any intellectual property related to its new investment approach, Liik notes.