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.