For investment advisors, confidence in the products they’re allocating their clients’ assets to is vital. It doesn’t look good if you put your clients into an exchange-traded fund that closes shortly after you make the investment. It especially doesn’t look good if a fund closes and a client faces tax consequences as a result of that closure.
The ETF.com database of ETFs has a tool to help with that particular uncertainty. FactSet, the site’s data provider, determines the closure risk of any given fund based on a variety of quantitative criteria and assigns a fund a risk level of low, medium or high.
Being labeled “high” risk doesn’t necessarily mean a fund is doomed, which is good, because nearly one-third of U.S.-listed ETFs are rated as such based on FactSet’s proprietary methodology. A variety of other subjective criteria may be behind a fund’s closure.
Of course, the biggest indicator of a fund closing is assets under management, though that’s not always the best way to determine the level of risk.
For example, not a lot of people expected Credit Suisse in 2016 to shutter its triple-exposure leveraged and inverse oil ETNs that had combined assets of $1.8 billion. The leveraged ETN in that case was the first exchange-traded product with more than $1 billion in assets to close, Bloomberg senior ETF analyst Eric Balchunas noted at the time. The likely reason for those closures may have been that Credit Suisse was cleaning up its balance sheets, and ETNs show up as a liability.
That same year, State Street Global Advisor shuttered a number of ETFs. One of the most surprising was the SPDR Nuveen Barclays California Municipal Bond ETF (CXA), which had $150 million in assets. However, CXA was a California municipal bond ETF, and had a limited investor audience given that such a product would appeal mostly to residents of that state. It also was less than half the size of the competing iShares ETF covering the same category.
But there aren’t a lot of examples of outcomes like those—in most cases, market participants view a fund with $50 million as being pretty safe from closure unless it hovers around that level for too long without growing. More than $100 million in assets is all but a guarantee a fund will survive except for very specific situations like the ones outlined above.
FactSet Senior ETF Analyst Lois Gregson says each fund is considered individually and evaluated solely on the basis of quantitative criteria. Those cover things like assets under management, trading activity, the size of a fund’s peer group, rank in the group, and issuer size. Performance isn’t considered.
“Really the purpose for the fund closure risk was to surface those possibly hidden things, [such as] what you want to be concerned with if you're doing a comparison within a segment,” she told ETF.com.
She cautions that rather than being viewed as absolutes, the labels should be taken into consideration together with other data.
Looking at the Current Market
The U.S.-listed ETF universe includes about 3,050 funds, having hit 3,000 several weeks ago.
Of those funds, 858—or about 28%—had a “high” risk of closure. That’s up from 26% at the beginning of the year. Another 219 had a medium risk. And 1,951 ETFs—or 64%—had a low closure risk, while 20 were in the process of closing.
The ETFs with high closure risk ranged in size from just $8,000 in AUM to nearly $47 million. The funds with low closure risk ranged in size from essentially zero in assets all the way up to the nearly $350 billion invested in the SPDR S&P 500 ETF Trust (SPY); however, all the ETFs with a low closure risk that had $35 million or less in assets launched during 2022, and so have not been trading for more than one year.
The medium-risk ETFs range in size from nearly $19 million to $2.7 billion.
Some things do stand out in the data. For example, actively managed ETFs represent only about 32% of the entire ETF universe, but nearly 38% of ETFs rated as being at a high risk for closure are actively managed.
That’s not exactly surprising, as active management has not had a lot of popularity in the ETF industry if you look beyond the ARK funds, though when you look at launches, new active ETFs outnumber new passive ones. Plus, a lot of smaller firms entered the ETF market in the wake of the “ETF Rule” and rolled out their own active strategies, which can be difficult to keep afloat if they don't gather assets quickly.
When you look at individual asset classes, a few numbers catch the eye. For example, the category of ETFs with the highest proportion of high-closure-risk funds is Leveraged ETFs.
Nearly one-half of them are considered high risk—remember that 28% of all ETFs have a high closure risk for comparison. Meanwhile, 42% of asset allocation ETFs are rated as having a high closure risk, followed by inverse ETFs, with 38% of ETFs in that area labeled as being at a high risk for closure.
Again, that's not really surprising with regard to the leveraged and inverse ETFs. They are tactical tools that tend not to have sticky assets, and their popularity is highly dependent on investment trends. Also, once these funds start to lose money, it’s very hard for them to rebound due to the problem of compounding.
Taking another perspective, equity U.S. ETFs are the largest category in terms of number of funds, representing about 35% of the total ETF universe. However, U.S. equity ETFs only represent about 27% of the ETFs with high closure risk.
Similarly, U.S. fixed income represents 14% of all ETFs, but it represents only 9% of the total ETFs labeled high closure risk. This could be because of home country bias or because the first ETFs were all U.S. focused, so they predominate among the older funds.
And while international equity ETFs represent 29% of the domestic ETF universe, they represent 36% of the ETFs with a high closure risk. That higher number could again be caused by home-country bias causing investors to favor funds covering the U.S.
Using the Metric
If you want to verify whether an ETF you own has a high closure risk, check out the fund page on ETF.com (ETF.com/ticker) and scroll all the way down to the “Fund Structure” info box. That will tell you if a fund has met FactSet’s criteria for high fund closure risk.
You can also go to the screener tool on the site and click on the “custom” tab, then on the gear symbol that appears under the tab’s name. From there you can select the closure risk option to be included in the data that appears.
Contact Heather Bell at [email protected]