Crowding At The ETF Graveyard

Key Takeaways

• The 212 exchange-traded products that closed year to date through Oct. 16 is higher than the 152 and 151, respectively, in the prior two calendar years.
• Invesco and BlackRock shuttered 66 and 39 funds, respectively, since the beginning of 2018, which has provided greater focus on the Invesco S&P 500 Low Volatility ETF (SPLV) and the iShares CyberSecurity and Tech ETF (IHAK) fund family siblings. BlackRock and WisdomTree also closed a combined 23 currency hedged equity products due to lack of demand.
• In addition, Barclays, UBS and Velocity Shares scaled back their combined ETN lineups by more than 100 products in the past two-plus years, shrinking the universe of these less popular products.

Fundmental Context

The exchange-traded product graveyard is filling up. Driven by a high number of ETN closures, the rationalization of industry consolidation, and a shift in asset manager priorities, 212 exchange-traded products have closed year to date through Oct. 16, higher than the 151 and 152 products in the prior two calendar years, according to CFRA’s First Bridge ETF database.

While the acronym “ETF” is often used broadly, CFRA distinguishes between exchanged-traded funds (ETFs), such as the SPDR S&P 500 ETF Trust (SPY); exchange-traded notes (ETNs), such as the JPMorgan Alerian MLP Index ETN (AMJ), other products such as exchange-traded commodities (ETCs); and exchange-traded managed funds (ETMFs).

In 2020, the 52 ETNs that have closed thus far is much higher than the 14 in 2019, but is still below the 72 that were phased out in 2018. Meanwhile, the 154 ETFs that ceased trading this year is approaching the 186 combined funds killed off in 2018 and 2019. We think the regular product pruning by asset managers is healthy, as most ETFs that closed had asset bases below $50 million, and the removal impacts a limited number of investors.

Chart 1: Exchange-Traded Product Type Closures Since 2018

Source: CFRA’s First Bridge ETF Database; as of Oct. 16, 2020

Invesco’s prior acquisitions have led to the firm’s industry-leading closures. In the last three years, Invesco acquired the mutual fund and ETF lineups of Guggenheim and Oppenheimer Funds. While the firm retained some popular products, such as the Invesco S&P 500 Equal Weight ETF (RSP) and the Invesco Russell 1000 Dynamic Multifactor ETF (OMFL), it has closed 66 ETFs since the beginning of 2018.

Some of the funds that were shut down were niche-oriented, such as the Invesco Chinese Yuan Dim Sum Bond ETF (DSUM), but others focused on parts of the market that overlapped with the firm’s well-established products. These included the Invesco Russell 1000 Low Volatility Factor ETF (OVOL) and the Invesco Russell 1000 Value Factor ETF (OVLU), which came from OppenheimerFunds. At the time of closing in February 2020, OVOL and OVLU were smaller than SPLV and the Invesco S&P 500 Pure Value ETF (RPV).

Chart 2: Exchange-Traded Product Closures By Asset Manager Since 2018

Source: CFRA’s First Bridge ETF Database; as of Oct. 16, 2020

BlackRock and WisdomTree have reduced their currency hedged ETF presence in recent years. BlackRock, the largest U.S. ETF provider, closed 39 products since 2018, 14 of them previously designed to reduce the impact of foreign currencies relative to the U.S. dollar. In August 2020, the firm closed five products, including the iShares Currency Hedged MSCI Italy ETF (HEWI) and the iShares Currency Hedged MSCI Australia ETF (HAUD).

Similarly, nine of the 31 ETFs WisdomTree closed since 2018 were currency hedged global equity ETFs, including yen-hedged sector funds offerings such as the WisdomTree Japan Hedged Health Care Fund (DXJH). Demand for currency hedged equity ETFs has shrunk from the days when the WisdomTree Japan Hedged Equity Fund (DXJ) was considerably larger than its current $1.6 billion asset base.

BlackRock shuttered nine multifactor sector ETFs in August 2018 that focused on GICS sectors like health care and information tTechnology due to limited demand. In recent years, the firm has focused more attention on thematic strategies, including the iShares Genomics Immunology And HealthCare ETF (IDNA) and IHAK.

ETN issuers and leveraged ETF providers have also scaled back. Barclays, UBS and Velocity Shares closed 62, 24 and 21 ETNs, respectively, in the past nearly three years, with the ETRACS S&P GSCI Crude Oil Total Return Index ETN (OILX) and the iPath US Treasury 2 Year Bull ETN (DTUL) among them. Meanwhile, the VelocityShares Daily 2x VIX Short Term ETN (TVIX) was a prominent leveraged ETN before it closed in July.

In addition, Direxion eliminated 33 ETFs, including seven leveraged or inverse products in October 2020 alone. Examples include the Direxion Daily Communication Services Index Bull 3X Shares (TAWK) and the Direxion Daily Communication Services Index Bear 3X Shares (MUTE). In contrast, Direxion expanded its traditional equity ETF lineup with the thematic launches of the Direxion Work From Home ETF (WFH) and the Direxion Connected Consumer ETF (CCON) in June and August of this year.

Conclusion

The ETF industry remains quite healthy, in our view. While a high number of exchange-traded products failed to survive in recent years, we do not have concerns. Indeed, with approximately $350 billion of net inflows and $4.9 trillion in assets for U.S.-listed ETFs, it behooves asset managers to ensure they have resources focused on the products that are resonating best with investors or that fill their lineups with new offerings.

We think ETF closures will persist, and there are 416 ETFs rated by CFRA (23% of our coverage universe) with market capitalizations of $25 million or less. While some of these are appealing ETFs to us on a forward-looking base, it is likely quite a few of them will be sent to the ETF graveyard before too long to make room on the asset manager’s shelf for alternatives.

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