“Zombie ETFs” thrown in the trash

Asset management giant takes extreme step to trim ETF fat

It seems you actually can have too much of a good thing.

According to a Bloomberg report, BlackRock Inc., the world’s largest asset manager, plans to shutter 10 exchange-traded funds this month, despite all posting gains this year. The reason? They’re just not that popular with investors.

With ETF posting impressive gains in AUM over the past five years, fund companies are now more emboldened to take failing products off their shelves. So-called “zombie ETFs” – funds that have attracted little trading activity or investment – are increasingly destined for the trash bin by providers seeking to streamline their offerings.

Industry-wide casualties this year include ETFs designed to tap demand for Chinese assets and currency hedging — both strategies that garnered billions of dollars for some funds but not for others.
The massive expansion in ETFs is a double-edged sword for the industry. It’s provided an opportunity for firms to formulate new fund baskets to offer investors. This growth, however, has made it increasingly hard for products to make their mark.

From 226 funds started in the last 12 months, only 21 have gained more than US$100 million of assets, data compiled by Bloomberg show. Funds need approximately US$75 million to US$100 million to survive, UBS’s Perlman estimates.

There are different reasons why ETFs fail. Strategy is one factor: if investors don’t buy the rationale for a fund that bets on high-yield debt using credit-default swaps or one that seeks income via put options, it’s doomed. Timing is also critical, as stepping into a crowded field is a major risk.

With the global ETF universe set to grow to US$15 trillion over the next decade according to exchange Bats Global Markets Inc., liquidations will become a natural part of the market fabric.

“We don’t want products that clients aren’t interested in trading,” said Sylvia Jablonski, head of capital markets and institutional strategy at Direxion, a US ETF company. “We do everything we can to get the word out and let the investing public know that the product is there. But then, at the end of the day, it’s really up to the client.”

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