First-year highs more crucial than ever for new ETFs

The chances of breaking into the crowded ETF space, much less succeeding in it, have become decidedly slimmer

First-year highs more crucial than ever for new ETFs

Well before the global ETF space reached its US$4.7-trillion nadir last year, observers have expressed concern over possible saturation as shown by fund closings. And based on new statistics, the risk of closure is especially pronounced for the providers who arrived late to the party.

“These days, the path to success [for new ETFs] seems ever narrower,” wrote FactSet Director of ETF Research Elisabeth Kashner in a new commentary. “Not only are the major market segments well-covered, and the potential fee revenue compressed, but market acceptance of new ideas is disappearing.”

While closures are generally a sign of a healthy survival-of-the-fittest dynamic, Kashner pointed to a rising number of closures in proportion to new launches — evidence, she said, of asset managers’ diminishing sense of opportunity and rising willingness to throw in the towel.

Grouping funds based on the asset levels they amass in their first year suggests even more trouble. “The number of funds that accumulate less than US$50 million or close up shop in their first year has been growing steadily since 2003,” Kashner said.

An 81% majority of funds launched in the US last year, she noted, finished 2018 with less than US$50 million in assets; only 2% managed to breach the billion-dollar mark. It spells increasingly acute growing pains for many asset managers who expect healthy inflows after three to five years of existence.

“It turns out that fund assets at the 12-month mark are strongly predictive of current asset levels, as a study of all funds launched between 2007 and 2016 reveals,” she added.

Among those ETFs that had less than US$50 million in assets by their first birthday, 44% have closed, while another 30% are still languishing in the sub-US$50 million range. At the other extreme, only a handful of funds that gathered over US$1 billion in their first year have since closed, while over three-quarters are still enjoying those eye-watering asset levels.

“There is greater mobility among funds that gathered mid-range asset levels in their first 12 months,” Kashner noted.

The field of successful launches gets significantly narrower when one screens for funds that achieved natural success. Based on FactSet’s data, only nine ETFs launched in 2017 and 2018 have been billion-dollar winners, but seven of them succeeded because of in-house investments. Of the remaining two, the firm only counted the JPMorgan Ultra-Short Income ETF (JPST) as a natural success that acquired funds from a variety of unaffiliated investors.

“The other, the Communication Services Select Sector SPDR Fund (XLC), is more of a me-too product,” Kashner said. “The gates to opportunity in the ETF industry are beginning to rust shut to all but those with in-house assets to cannibalize.


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