Launches & Flows Disconnected
Elisabeth Kashner, CFA, director of ETF research at FactSet, says there’s been a big disconnect between fund launches and asset flows for the past few years. Counting the number of ETF launches into four groups—vanilla, strategic, active and idiosyncratic—since 2014, she notes there was a huge surge in strategic launches in 2015 and 2016.
“But if you look at where the dollars are going, it’s not there [to strategic funds]. The dollars are going into the plain-vanilla funds. There’s been an enormous disconnection between issuers and money,” she said.
Rosenbluth says part of that trend might be new investors and advisors entering the ETF space.
“It’s logical to us that next year we may see their growing comfort in rounding out the portfolio with smart-beta tilts ... and other things that are more second-wave products,” he said.
Some of the new active management and smart-beta launches hit the market with large seed capital, such as GDVD and the PowerShares Treasury Collateral Portfolio (CLTL). Kashner and Rosenbluth say that can help the funds stand out. But that doesn’t mean starting with a lot of capital will entice investors.
Kashner notes that, of the active management funds launched this year, only nine showed continued growth after launch in a relatively steady pattern, while the rest didn’t attract any new investment.
Another trend for launches was commodity funds, even as commodity prices—particularly in energy and agricultural commodities—withered.
Among some standouts were the GraniteShares Gold Trust (BAR), which boasts a lower expense ratio—by 20 basis points—than rivals iShares Gold Trust (IAU) and the SPDR Gold Trust (GLD). Also, a few triple exposure crude oil funds launched, such as the United States 3X Oil Fund (USOU) and the United States 3X Short Oil Fund (USOD) from USCF, and the ProShares UltraPro 3x Crude Oil ETF (OILU) and the ProShares UltraPro 3x Short Crude Oil ETF (OILD).
So why launch funds when the underlying market isn’t performing well? Rosenbluth says that’s not necessarily a problem.
“I don’t think you want to be waiting until the market moves back to the favor to be launching the product,” he said. “It’s better to establish a record, establish trading history. While commodities haven’t performed well this year, in relation to equities, for many there are diversification benefits.”
Part of that is getting ready for changes in market cycles. One popular type of ETF that’s fallen out of favor with investors is currency-hedged ETFs, which were the rage in 2015-16 when the U.S. dollar was strong. Rosenbluth calls these ETFs “a perfect example” of how products can lose their luster.
“International equity has been extremely popular, and an appropriate place to invest given the returns that they generate, but it’s truly been an unhedged success story,” he noted. “By hedging, you’ve missed out on some of the gains. Money doesn’t chase what’s missed out on the gains.”