ETFs may be gathering assets at a record pace, but not all funds are thriving. A record 42 exchange-traded funds are scheduled to close in September as issuers throw in the towel on products that failed to gain traction with investors.
It goes without saying, as competition is fierce in the ETF world. Unless a fund is large, liquid and cheap, it's an uphill battle to attract new money.
A midyear report from FactSet showed that a mere 20 ETFs with a median expense ratio of 0.07% took in half of the $250 billion in new assets through the first six months of 2017.
It's hard to imagine flows could get even more concentrated than that, but they did. A more recent report from FactSet revealed that only 10 ETFs garnered half of all inflows in the month of August.
In the face of numbers like that, it's an uphill battle for smaller and more expensive ETFs to survive, let alone thrive. The 42 ETF closures in September is testament to that.
But surprisingly, there are a number of funds with those characteristics that are indeed thriving. Eric Balchunas, ETF analyst at Bloomberg Intelligence, recently pointed out 10 ETFs whose assets more than tripled this year despite having above-average expense ratios.
The list can be found below, and includes high-flyers like the ROBO Global Robotics and Automation Index ETF (ROBO), the KraneShares CSI China Internet ETF (KWEB) and the Global X Lithium & Battery Tech ETF (LIT).
The group, which has a median expense ratio of 0.66%, is ranked based on growth in assets under management from the beginning of the year through Sept. 12 (inflows plus price appreciation). ETFs with AUM of less than $100 million at the start of the year were screened out.
|ROBO||Robo Global Robotics and Automation Index ETF||134.7||1,128.50||738.1|
|SVXY||ProShares Short VIX Short-Term Futures ETF||227.4||1,351.60||494.2|
|KWEB||KraneShares CSI China Internet ETF||203.2||927.4||356.5|
|FDT||First Trust Developed Markets ex-US AlphaDEX Fund||158.2||571.0||261.0|
|LVHD||Legg Mason Low Volatility High Dividend ETF||108.5||383.9||253.7|
|LIT||Global X Lithium & Battery Tech ETF||114.0||399.3||250.4|
|VIGI||Vanguard International Dividend Appreciation ETF||163.8||550.9||236.4|
|EEMA||iShares MSCI Emerging Markets Asia ETF||154.5||499.8||223.6|
|VYMI||Vanguard International High Dividend Yield ETF||157.2||503.6||220.3|
|FDD||First Trust Stoxx European Select Dividend Index Fund||157.9||499.8||341.9|
Replacement For Active Funds
Balchunas believes investors are using these ETFs to try to outperform the broader stock market.
"Not everybody in the world is going to be satisfied with three Vanguard index funds," he said. "There will always be a need to try to be better, to try and outperform, to play a hot story. It used to be you'd use active mutual funds for that. Now you have a lot more choice."
One of those choices is theme ETFs. Balchunas says investors may be using these ETFs―such as ROBO, KWEB and LIT―in the way they might have used active mutual funds before.
"Their new role is going to be on the outskirts of the portfolio―the supporting actors. Out there, you want high active-share; you want something that's more volatile," Balchunas remarked.
For investors in these funds, costs don't matter so much as performance. By ETF standards, ROBO's 0.95% expense ratio is steep, but is "in the ballpark of an active fund or hedge fund," he adds.
ROBO is up close to 33% this year, while KWEB is up 68% and LIT is up 49%.
With performance like that, it's understandable why investors aren't as concerned about the expense ratio.
In addition to their strong performance, Balchunas points out that each of these funds has a simple, compelling story that resonates with investors and plays a large part in their success.
Smart But Dangerous Product
One product on the list that is distinct from the rest is the ProShares Short VIX Short-Term Futures ETF (SVXY), which is up a whopping 82% year-to-date. While the other nine ETFs can be considered replacements for actively managed equity funds, SVXY is in a class of its own because it uses derivatives.
"SVXY is a smart product," Balchunas said. "It turns roll costs into yield, which has helped it clean up in this low-volatility market. But we've seen cases where the short-volatility trade can go down 20-30% in a day or week."
Bring Your Own Assets
Another interesting product that Balchunas points out is the Legg Mason Low Volatility High Dividend ETF (LVHD).
"LVHD is an example of 'BYOA'―bring your own assets," explained Balchunas. He says that a lot of the inflows into ETF products from Legg Mason, Goldman Sachs, J.P. Morgan and Fidelity may be from existing clients of those firms.
"Even though these issuers have bright futures, a lot of the assets you see in their products are current clients who may have thought of leaving a mutual fund and going to a competitor, but instead simply moved over into one of the firm's ETFs," he noted.
Out of all the ETFs on the list, LVHD has the smallest year-to-date return, at 8.3%. Gains for the rest range from 16% to 82%, as can be seen from the table below:
Contact Sumit Roy at [email protected]