Industry Should Close 200 More ETFs

August 23, 2010

The Claymore and RiverPark closings aren’t enough; the industry should close an additional 200+ funds.

People get antsy whenever an ETF closes. There’s always a flurry of news stories, and commentators aplenty come out eager to mark the end of the ETF industry’s growth period. I received a series of inquiries from the press following the recent announcements that Claymore was closing four ETFs and Grail Advisors was closing two funds.

The worries are overblown. If anything, more ETFs need to close, not fewer.

According to data compiled by both IndexUniverse.com and ETF Death Watch, we’re actually in a down year for fund closures. If you count the Claymore and Grail funds mentioned above, which aren’t actually closed yet but will wind down operations in the next few weeks, there have been 29 ETFs shut down year-to-date. That puts us on pace for 41 fund closures this year, down from the 56 funds that closed in 2009 and the 58 funds that closed in 2008.

 

US ETPs Closed

 

Meanwhile, the pace of fund launches continues. One hundred and fifty new ETFs have launched year-to-date. If we stay on that pace, a total of 211 new funds will come to market in 2010. That would be the third-most ever by year, trailing only 2007’s 292 and 2008’s 220 launches.

If you net it all out, it looks like 170 additional ETFs will be on the market come January 1, 2011, compared with January 1, 2010.

That’s pretty healthy growth. In fact, it’s probably a little too healthy.

The ETF industry works best if investors can trust ETFs to be liquid and to track closely to their stated index. Today, that’s not always the case. There are 213 ETFs with less than $10 million in assets under management on the market today. There are 73 ETFs that traded less than 1,000 shares a day, on average, over the course of the last month. Investors in many of those funds face wide spreads and significant liquidity challenges.

The ETF industry as a whole will do a better job of delivering on its core promises if it periodically clears the deck of failed funds. For that to happen, we probably need to see 100 ETFs close a year, at a minimum.

That doesn’t mean the total number of ETFs on the market will decline; my guess is we will continue to see 200+ ETFs come to market on a yearly basis.

It’s just life in a growing industry. Some of what comes to market works, some doesn’t. Survival of the fittest.

 

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