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.

“Previously, I had talked to advisors who had gone far down the route of planning an ETF launch and didn’t fully appreciate the requirements that you’re held to as an advisor and the costs associated with that,” says Krisko, whose firm is the sub-advisor to 35 ETFs, 5 UCITs and 97 separately managed accounts with total assets of roughly $4.3 billion.

“I think people are more educated now, and the number of liquidations has made some firms pause and carefully think about their ETF aspirations,” she says.

There has been no shortage of ETFs with narrow investment objectives that didn't gain traction with investors. Indeed, ETF closures have steadily risen from 79 in 2014 to 155 in 2018, according to FactSet. There have been 84 closures of ETFs and ETNs so far this year.

“I think the recent spate of liquidations were a healthy maturation of the industry,” Krisko says, adding that she expects the ETF business to regain steam in coming months even if it’s not at the breakneck pace of recent years.

“From Vident’s perspective we have a healthy pipeline of product launches planned by our clients for the fourth quarter and into 2020,” she says. “And given the maturity and saturation of strategies on the equity side, and where we are in the market cycle, we’re seeing people turning to fixed income and/or yield generation strategies.”

Krisko believes the real growth opportunity will come when retirement plans more readily adopt ETFs.

Meanwhile, Rosenbluth from CFRA also expects 2020 to be a strong year for ETF launches.

“By the end of this year we should have the first of the actively managed, non-transparent equity ETFs based on the Precidian structure that got approved earlier this year,” he says. “And I think we’ll see a wave of products tied to the ETF Rule.”

Rosenbluth believes the ETF Rule should goose the rollout of traditional, fully transparent (i.e., daily portfolio disclosure) actively managed ETFs. “It has been harder to get approval for a transparent actively managed ETF than a traditional index-based one,” he says. “I think with clear, consistent rules from the SEC we’ll see more of these types of products.”