Fund terminations accelerated even as global ETF assets reached new summit
The coronavirus pandemic crisis in 2020 wasn’t enough to curb investors’ appetite for ETFs, which reached a new high in AUM last year. But the wave of assets flowing into the popular products concealed an undercurrent of accelerating closures.
Citing data from TrackInsight, a recent report from the Financial Times said a record 297 ETFs around the world were terminated last year. The number also represented a sombre landmark from a percentage perspective: ETF closures represented 5.5% of the global universe last year, compared to a rate of 4.3% in 2019 and 3.5% in 2018.
“Put another way, more than one in 20 ETFs closed in 2020, due to poor performance or lack of investor interest,” Anaëlle Ubaldino of France-based Koris International, which is linked to TrackInsight, told the Times.
The closures occurred against a backdrop of strong inflows and rising markets that lifted overall ETF asset levels by 25% last year, bringing total assets to a record US$7.7 trillion. Launches overshadowed closures, with 318 new ETFs being introduced to bring the total number of ETFs up to 6,518.
One primary driver of closures, Ubaldino said, was a slew of industry takeovers that saw fund groups assimilating newly acquired ETFs into their pre-existing product shelf. A noteworthy example, Invesco shuttered 45 ETFs in part due to takeovers of OppenheimerFunds and the ETF unit of Guggenheim Investments in recent years.
“There were a lot of redundant products across the ranges the firm acquired, and also a number of products it rolled out organically that failed to gain traction,” Ben Johnson, director of global ETF research at Morningstar, told the financial news outlet.
An increased willingness by providers to pull the plug on sub-scale funds was another major driver of terminations. As noted by ETFGI co-founder Deborah Fuhr, ETFs typically need between US$50 million and US$100 million of assets to be considered profitable enough to be maintained.
“There is the challenge of margin pressure and trying to cut costs in running businesses,” Fuhr said.
As the ETF industry matured in recent years, Johnson said it became increasingly difficult for providers to find unstaked territory: as products became increasingly niche and esoteric, the likelihood of reaching a critical mass of investor assets decreased. Poor performance also contributed to the demise of a number of factor-based ETFs, as well as liquid alternative funds.
“If an ETF hasn’t raised significant enough assets to cover its costs, then you are basically funding that ETF from some other area of your business,” Fuhr said.
