[This article appears in our November 2019 issue of ETFR.]
Earlier this year, CFRA released a report that looked at data on more than 1,600 ETFs for a five-year period, “Analyzing ETF Success & Failure: A Five-Year Look Back.” The report considers the growth of the targeted ETFs, the issuers behind them and closures, among other data. ETF Report spoke with one of the authors of the report, Todd Rosenbluth, CFRA’s head of ETF and mutual fund research, about what he and colleague Aniket Ullal discovered when they dug into the data.
What was the overall objective of the study, or what you were aiming to document?
There’s a lot of great ETF commentary published on ETF.com and on other outlets that track fund flows, that track closures, that track winners and losers within the ETF landscape. But most of it’s done within a shorter window of time—either on a monthly basis, or on a calendar year basis.
We felt there was a lot of additional information that could be gleaned with a longer-term or an intermediate-term view, and set out to look back roughly five years in time. That’s a reasonable period of time to judge an ETF’s viability, a reasonable period of time to let the winners and losers shake out, a reasonable period of time for products that might have been a fad or that saw brief demand, only to have that demand peter out.
We’re intentionally omitting a few things. Our goal is to avoid survivorship bias, so we consider the same ETFs over the five-year period. We wanted to understand what ETFs closed. Obviously, as of August 2019, 25% of these products are done, so the winners would look even stronger and the losers would look even worse in that period of time, if we had shaken those products out. There have been hundreds of products that have come to market since then. We have left those out of the equation too.
Our goal is to follow the targeted products through their life cycle (see Figure 1).
What results stood out the most to you?
It’s extremely hard as an ETF analyst to keep track of what’s disappeared, what’s closed. There’s a handful of ETFs that we tend to remember, that probably should have never launched and died very quickly. But there are so many other products that were around for a period of time, and then they’re just gone from the consciousness. And unless you went digging and searching for those products, you wouldn’t know it.
The fact that nearly 25% of the products closed was a higher number than I expected. Now, closures aren’t necessarily a bad thing—it’s a sign of a mature industry.
The other thing that surprised us—and it’s still a very small number—was that 30 ETFs had an objective change. It’s easy to miss these products, because most of the objective changes were because the products were so small, and not top of mind for investors and/or ETF analysts like myself, so that it was easy to ignore.
The fund isn’t in our window of reference after 2014, but the cannabis ETF, the ETFMG Alternative Harvest ETF (MJ), was a Latin America real estate ETF before switching themes. And that’s far and away a poster child of this happening. Now, it’s a $1 billion product. But we’re big believers in holdings-level analysis. When a Taiwan ETF becomes an India ETF, the track record is irrelevant; the holdings are what matters.
Also, during the last couple years, Vanguard and BlackRock have stood out among the pack, in terms of flows, with their low-cost, asset allocation products. But I think it’s extremely enlightening to see that 69 of the top 100 ETFs that experienced the most growth were from those firms. Those two firms have broad product lineups, and their success has been broadly based.