Russell ETF Closures Dilemma

August 20, 2012

Russell’s ‘strategic review’ has turned into a full-scale closure of all but one of its ETFs, and an active one at that.


In a statement released on Aug. 17, Russell said: “Regarding the closures, while the innovation behind Russell's next-generation ETF products received substantial interest in general, the market for them is still in its early days.”

In part this is true.

Russell had—or, really, still has—a splendid array of very niche ETFs: the Russell Small Cap Low P/E ETF (NasdaqGM: SCLP), the Russell 1000 High Volatility ETF (NYSEArca: HVOL) and the Russell Developed ex-US High Momentum ETF (NYSEArca: XHMO), to name a few.

Perhaps the market wasn’t ready, or maybe will never be ready, for such specific investment vehicles.

However, another part of this unhappy ending for Russell shouldn’t be overlooked—the fact that the company simply couldn’t compete with the big dogs of the ETF world.

Its most popular ETF is the Russell 1000 Low Volatility ETF (NYSEArca: LVOL) with $69 million under management. However, both the PowerShares S&P 500 Low Volatility Portfolio (NYSEArca: SPLV) and the iShares MSCI USA Minimum Volatility Index Fund (NYSEArca: USMV) handily beat LVOL in assets, managing $2.4 billion and $375 million, respectively.

The three funds launched within months of each other last year. But the ETF world is tough, and the competition for the lowest management fees is cutthroat. LVOL charges 20 basis points, right between SPLV’s 25 bps and USMV’s 15 bps.

Although the low fees were great for investors, it made running the funds with relatively few assets unsustainable. That’s exactly what my colleague Carolyn Hill pointed out in an earlier blog—namely that Russell’s ETF business wasn’t profitable.

Based on July 31 management fees and asset figures, Russell’s yearly revenues for its 26 funds would fall just under $1 million.

However, Russell did decide to spare one ETF from liquidation, the actively managed Russell Equity Fund (NYSEArca: ONEF) in a gesture toward the company’s strategic shift toward actively managed ETFs.


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