On the heels of FocusShares' demise, Russell comes out with a plan to shrink its ETF unit.
On Monday, FocusShares announced it would be closing its entire suite of 15 funds effective Aug. 17.
Amid all the hoopla over FocusShares, Russell has announced a strategic review of its ETF business and a plan to scale back its ETF team.
While I would expect Russell to close some of its funds, it seems unlikely it will shut down its entire ETF business, since it is still in better shape than FocusShares’.
As of July 31, the FocusShares funds had just over $100 million in AUM. Its most popular fund, the Focus Morningstar U.S. Market ETF (NYSEArca: FMU), still had less than $20 million.
The FocusShares funds offered broad, neutral exposure to their target markets at low cost. FMU, along with the Focus Morningstar Large Cap ETF (NYSEArca: FLG) charged just 0.05 percent. Its other 13 funds charged between 0.12 and 0.19 percent.
The cost model was great for investors, but not great from a business continuity standpoint. With such low expense ratios, the funds needed a high asset base to remain viable. Yearly revenues based on July 31 AUM would be just $141,000—hardly enough to keep a company going.
In contrast, Russell has over $300 million spread unevenly across 26 funds. Twenty of the 26 have less than $10 million in AUM, with the vast majority of those 20 clustering around $5 million.
At least four, however, have been successful. The Russell 1000 Low Volatility ETF (NYSEArca: LVOL) has close to $70 million, the Russell Equity Income ETF (NYSEArca: EQIN) has $50 million, and the Russell Consistent Growth (NYSEArca: CONG) and Russell 1000 Low Beta ETFs (NYSEArca: LBTA) have attracted reasonable asset bases as well.
In addition, the Russell funds all charge higher expense ratios than the FocusShares funds, so they don’t need to attract the same large asset base: On average, the Russell ETFs charge around 0.33 percent.
Overall, based on AUM counts on July 31, Russell’s yearly revenues would be just under $1 million. That amount isn’t enough to run 26 funds, but it’s certainly enough to keep the profitable funds running—LVOL, CONG and EQIN alone make up about half of the Russell ETFs’ revenues.
Adding the Russell High Dividend Yield ETF (NYSEArca: HDIV), the Russell Growth at a Reasonable Price ETF (NYSEArca: GRPC) and LBTA brings projected yearly revenues up to $610,000—a reasonable, albeit not particularly exciting, figure.
If I had to predict the results of Russell’s strategic review, I would predict it closes the 20 funds that haven’t made inroads with investors and keeps the remaining 6. If you’re holding any of its smaller funds, now would be a good time to start researching alternate modes of exposure.
At the time the article was written, the author had no positions in the securities mentioned. Contact Carolyn Hill at [email protected].