With thousands of funds already carrying trillions of dollars, many new entrants are turning into ‘roadkill’
There’s no denying the momentum in ETFs as assets soaked up by such products have reached an estimated US$4 trillion globally. But what used to be a fertile space has become crowded and unforgiving as new entrants and smaller funds struggle to survive.
“More than 90 funds have closed this year through early October, following a record 139 closures last year,” reported The Wall Street Journal.
Citing FactSet, the Journal said that launches of new exchange-traded products, including ETFs and exchange-traded notes, reached a zenith in 2011, dipping immediately afterwards and remaining relatively flat since.
A more powerful shakeout could be developing, according to UBS ETF strategist David Perlman, who noted that over half of the roughly U.S.-listed 2,100 exchange-traded products in existence have less than US$100 million in assets — a critical target for young funds to reach within their first three to five years of existence.
A handful of firms including WisdomTree, ProShares ETF, and Invesco have had to close funds this year. Their stables also currently include youngling ETFs that are also at risk of being shuttered as they fall short of the AUM criteria.
“[A]s the industry has more and more participants it becomes harder to expand out into the marketplace,” ProShares CEO Michael Sapir told the Journal. “There’s a lot of roadkill out there.”
While the growth in ETF assets has been undeniably stellar, it’s by no means an even growth picture: Investors have tended toward low-cost passive funds offered by the largest providers. The oligopolistic climate is clear in a report by CFRA, which found a 90% surge in ETF assets over a five-year stretch through August, but 83% of those assets were absorbed by just 100 funds.
Among those 100, over two-thirds were managed by BlackRock and Vanguard, leaving as many as 119 other ETF providers to fight for scraps.
Some providers have tried to create laser-focused niche ETFs to avoid going toe-to-toe with larger rivals. That has succeeded in certain cases, such as the 5G tech-focused Defiance Next Gen Connectivity ETF, which crossed the US$100-million mark not long after its March launch.
But others, such as a pair of funds launched by WisdomTree as offshoots to its US$2.5-billion WisdomTree Japan Hedged Equity Fund, had to be closed after garnering little interest. “We tried to press our advantage, but Japan has been cold of late,” said Jeremy Schwartz, global head of research at WisdomTree.
Some firms have also found success by launching copycat strategies. Two months after the Defiance Next Gen Connectivity ETF was introduced, First Trust reinvented a floundering eight-year-old fund into the First Trust Indxx Next G ETF; it collected over US$100 million within five weeks and currently has US$203.2 million in AUM.
Others see a path forward through active ETFs, with leadership at Fidelity Investments and Franklin Templeton sharing plans to expand into active equity strategies after initially concentrating on fixed income. Such decisions could become more common with the U.S. Securities and Exchange Commission’s decision earlier this year to allow the launching of non-transparent ETF strategies, along with a more recent move to streamline the ETF launch process for U.S. providers.
Still, the active approach exposes the ETF industry to the risk of market underperformance, which analysts cite as the very same weakness that led to a decline in mutual-fund assets.