There are now 337 exchange-traded funds pushing up the daisies. More than 40 percent of those deaths by Darwin took place in the last 18 months, when ETF inflows have broken records.
While ETF closures can be an inconvenience for investors in the short term, in the long run they are healthy for the industry and investors. And while some of the deaths are simply due to bad timing, closures help weed out weaker players and lead to higher-quality products. A recent article on the Index Universe web site said the rapid pace of closures “speaks more about an industry in growth mode than one in retreat.”
A stroll through the ETF graveyard shows why some of the funds don't last. Here’s a look at a few of the more famous defunct ETFs and the lessons we can take from their demise.
HealthShares Emerging Cancer (HHJ), 2007-2008
This is the ETF that Vanguard's John Bogle loves to hate on. “Can you believe we now have an Emerging Cancer ETF?” Bogle wrote in a 2007 Wall Street Journal op-ed. He blasted the ETF again, five years after its closure, at a Morningstar conference in June.
HHJ was one of 19 specialized health-care ETFs created by the now defunct XShares.
Others included HealthShares Neuroscience and HealthShares Infectious Disease. The company said they weren’t able to attract assets and that their “timing was bad.”
Lesson: What may work in 2060 may not work now.
PowerShares DB Crude Oil 2X (DXO), 2008-2009
This exchange-traded note closed with $425 million in assets, by far the largest ETN or ETF ever to close. Why? According to the press release, “limitations imposed by the exchange.” The Commodity Futures Trading Commission was worried about DXO owning too much of the crude oil futures market. This was baffling to some investors, since an ETF or ETN is not one big investor but a vehicle for many small investors.