Nothing ventured, nothing gained. That has been a longstanding attitude in the exchange-traded fund industry as seemingly any new fund concept deemed worth pursuing was thrown against the wall to see if it would stick. But nearly a decade after the ETF industry really took off, a clear shift in mindset has set in. While new funds are still being launched at a solid pace, a rising tide of existing ETFs are being liquidated as well.

Since 2008, the number of U.S. ETFs has surged from around 700 to more than 1,600 today, according to the Investment Company Institute. And assets under management in the ETF industry have roughly quadrupled to $2.3 trillion in the past eight years, according to fund data tracker XTF.

But the go-go years for the ETF industry could be downshifting into the start of an industry shakeout. ETF closures have been steadily rising in the past few years, reaching 75 in 2015. XTF says that 104 funds have been delisted year-to-date, which would be the most on record.

While total ETF industry growth has been impressive, and will likely remain so in coming years, it’s increasingly clear that many funds simply aren’t viable.  Each new fund requires hundreds of thousands of dollars to launch, and further ongoing yearly expenses to keep them up and running.

That’s not usually a concern for large financial services firms, which have the resources to launch and properly market a new fund. Indeed, this is an industry that clearly favors heft. The top 20 ETFs account for around 40 percent of total ETF assets under management, and around 80 percent of industry assets are concentrated at BlackRock (iShares), Vanguard and State Street (SPDRs). At the other end of the spectrum, more than 450 less popular ETFs have less than $10 million in assets each, according to XTF.com

Even that asset base may not be enough to support a fund. Todd Rosenbluth, director of ETF and mutual fund research at CFRA, says fund closures typically occur when AUM is less than $50 million in assets. He adds that many smaller funds can remain open for business as long as the fund sponsors choose to be patient.

Still, the smallest funds are at a clear disadvantage. “If they have too few assets, they need to charge high expense ratios to cover their costs,” Rosenbluth says. “They can’t get the scale to bring the fees down, which creates a chicken-and-egg problem.”

One recent study by FactSet Research found that one-third of all current ETFs are at a medium to high risk of closure. Many of those funds are of the “me-too” variety, focusing on the same ground already trodden upon by larger fund peers.

Winnowing Process

“It’s part of an inevitable winnowing process,” says Amy Doberman, who was the former general counsel at ProShares Inc. and is now a securities partner at WilmerHale. She thinks the increase in fund closures is also due to a tougher regulatory climate.

“The exchanges require that after a certain period, a fund must have at least 50 beneficial owners to continue to qualify for a listing,” she says, adding that while the exchanges may have been more flexible in the past, “the rule is now being more strictly enforced.”

The logical move for investors would be to look up the number of beneficial owners before buying a fund, but you won’t find the data in a fund’s prospectus. Yet it may be wise to assume that a fund “with low assets and thin trading after a year of operation may be a candidate for an eventual delisting,” Doberman says.

She also thinks more funds are being shuttered on a voluntary basis as well. “From a practical perspective, there’s a scarcity of capital at banks. They are looking to re-allocate their resources into the most productive funds.”

In some cases, the volume of fund closures at specific firms has been eye-catching. In August, for example, UBS closed nine of its Etracs exchange-traded note offerings.

And even the mighty iShares complex recently closed 10 ETFs, with a similar amount of funds closed by State Street and ProShares. It’s not just thinly-traded ETFs that are being shuttered. Five State Street funds, for example, had more than $50 million in assets each.

The fact that funds of that size are candidates for liquidation is a clear reflection that the ETF field may be getting too crowded. “The proliferation of funds in recent years has become a clear factor [in the recent wave of closures], and a winnowing process is inevitable,” says Doberman. She sees a shakeout in terms of both funds and smaller fund sponsors, suggesting that we might see a lot of industry consolidation.

CFRA’s Rosenbluth says investors should seek out larger, more frequently traded funds to help reduce the chances owning a candidate for liquidation. Choosing the larger fund also likely brings the added benefit of smaller bid/ask spreads, a key consideration for active ETF traders.

By no means is the ETF complex in trouble. Assets continue to migrate away from higher-cost mutual funds to lower-cost ETFs, and traditional mutual fund firms such as Fidelity are launching new ETFs at a quickening pace. But the rising tide of ETF closures suggests that investors should think twice before investing in a fund that has already been trading for a number of years and still has a modest asset base.