CLOSURES WILL REMAIN AT OR NEAR RECORD LEVELS
Last year was a record year for launches—the most the U.S. ETF industry has seen since 2011. However, 2016 isn’t even over yet, and although it’s seen a respectable number of new ETFs hit the market, it has blown past the previous record for closures.
As of the end of October, with two months left to the year, there were 111 closures, and in prior years there’ve only been two years where closures topped 100. Consider also that November and December often see large numbers of closures.
“A lot of companies try to square up their books at the end of the year and do some window dressing,” said Ron Rowland, founder and executive editor of ETF investing website and newsletter Invest With An Edge, and a portfolio manager with Flexible Plan Investments.
444 ETFs On ‘Deathwatch’
Rowlands maintains the “ETF Deathwatch” list on his website, which generally focuses on ETFs with less than $25 million in assets under management. As October drew to a close, there were 444 exchange-traded products on the list after two consecutive months of falling membership in the club no issuer wants their products to be in.
Although some of those removals were due to funds gathering more assets, even more were due to their closures being finalized.
However, Rowland notes that this year’s been different, with multiple funds with assets above $25 million closing.
“Larger and larger funds are closing. For my deathwatch, I’ve had $25 million as a cutoff, but there’s been many closures exceeding that this year,” he said. Most notable, and perhaps inexplicable, was the shutdown of the SPDR Nuveen Barclays California Municipal Bond ETF (CXA), which had roughly $150 million in assets under management.
And when iShares announced the closure of 10 ETFs earlier this year, half of the list was funds with assets of more than $25 million.
Fee Pressure Raising Breakeven Point
One possible reason is a potential shift in the dynamics of the ETF space at the far end of the spectrum. In a mature industry, established issuers with deep resources and multiple multibillion-dollar funds may simply no longer see such funds as worth their time if they don’t fit the firm’s vision going forward.
Rowland believes it may be that the downward pressure on fees has in turn raised the breakeven threshold for the average fund’s AUM.
That, along with the high launch rate, suggests that the closure rate will remain at or near record levels for the foreseeable future.
“There’s a lag. I’ve noticed that the closure activity tends to lag launch activity—peaks and troughs—by one to two years. There’s definitely what I’d consider a saturation of products, and that’s a contributing factor,” Rowland said. “I think if the launch rate stays high, the closure rate will stay high as well.”