ETFs’ Rising Tide Fails To Lift All Boats

January 11, 2013

While there’s no denying ETFs’ continuing growth in 2012, the space remains a tale of two cities—rich and poor.

Year-in-review articles covering 2012 ETFs had two common themes: Large and popular funds enjoyed strong inflows and offered fee cuts, while small ETFs were shuttered for lack of investor interest.

How should we interpret these conflicting messages? A picture’s worth a thousand words. Here’s a snapshot of ETF assets under management (AUM).


ETF Assets


Note the extreme polarization of funds with few assets on the left side of the chart and those with massive assets—over $1 billion—on the right.

More than 800 funds—well over half of all U.S.-listed ETFs—each have less than $100 million in AUM. And over 500 of these funds hold less than $25 million. I’ve screened out funds with less than six months of history, thereby excluding fledging funds that should be excused for weak interest.

While there’s no hard and fast rule about an asset threshold for ETF viability, there are hundreds of funds with tiny asset bases, and their viability is a major concern, in my view.

This point is consistent with the fact that 2012 was a banner year for fund closures.

You’ll also notice that the glut of closures was seen as a positive development by my fellow bloggers here at Index Universe, an opinion borne out by left side of the chart.

In short, I believe our ETF world still has too many funds that have too few assets. And I say that being mindful of the counterargument that more choice is always better.

This may be true in an imaginary frictionless world where all investors are deeply informed, with unlimited time to research their picks. In the real world, investors can stumble into funds with inadequate interest and suffer from potential fund closure, or more likely, poor liquidity.



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