Where did all of the new exchange-traded funds go?
It wasn’t long ago when it seemed each week saw several or more new ETFs (and exchange-traded notes) hit the market. There were 268 new exchange-traded products last year, 276 in 2017, 246 in 2016 and 285 in 2015, according to FactSet. That equates to five product launches per week during the four-year period.
The pace of product launches through August this year wasn’t far off of last year’s pace—142 this year versus 152 last year, according to ETF Guide. But the industry took a summer siesta, particularly in August with just four new ETF launches that entire month.
As calculated by XTF.com, the U.S. ETP marketplace has 2,294 products from 140 fund sponsors totaling $4.1 trillion in assets. Has the industry reached the saturation point?
“The ETF industry has peaks and valleys in terms of launches,” says Todd Rosenbluth, head of ETF and mutual fund research at CFRA. It’s a sign of maturity—not maturing—that they’re not just throwing products out there but are being more rational in trying to spot the trends that investors might find appealing.”
Rosenbluth and others also believe fund sponsors are waiting for the Securities and Exchange Commission to release new guidelines under its proposed rule 6c-11, otherwise known as the “ETF Rule,” which is designed to speed up the approval process for new ETFs and clarify the regulatory structure. That rule is expected to be released soon.
ETFs currently rely on exemptive orders permitting them to operate as investment companies under the Investment Company Act of 1940. Because ETFs possess characteristics of both mutual funds—which issue redeemable securities—and closed-end funds which generally issue shares that trade at market-determined prices on a securities exchange and aren’t redeemable, the SEC has mandated that ETFs need exemptions from certain provisions of the Investment Company Act in order to operate.
The agency has granted more than 300 exemptive orders since the U.S. ETF industry began a little more than a quarter century ago. Multiple ETFs can be launched based on one exemptive order.
Among its highlights, Rule 6c-11 would eliminate conditions included within the SEC’s exemptive orders the agency believes are no longer necessary, and it would remove historical distinctions between actively managed and index-based ETFs. In addition, the rule aims to level the playing field for ETFs that are organized as open-end funds and pursue the same or similar investment strategies. Ultimately, the SEC says the rule would create an efficient regulatory framework for ETFs.
Denise Krisko, president and co-founder of Vident Investment Advisory, posits another reason why there has been a pause in ETF launches. Namely, people have a better sense of the realities that come with rolling out an ETF.