This past year has been a record year for ETFs, and we don’t mean launches. The list of ETF/ETN closures has topped out at 128 products for 2016. That’s far beyond the 102 closures that represents the previous record.
“This isn't a sign of weakness; it's a sign of health. The ETF industry is still in the throes of creative destruction,” said ETF.com CEO Dave Nadig regarding the high level of delistings. “It's far better that funds are closed than that they sit around becoming untradable zombies.”
State Street Global Advisors’ SPDR family of ETFs saw the most closures from any single issuer, shutting down a total of 16 funds. What was unusual about SSgA’s list of delisting funds was the fact that some of the products had quite a bit in assets under management (AUM).
The SPDR Nuveen Barclays California Municipal Bond ETF (CXA), for example, had nearly $150 million in AUM when its closure was announced, while other products—including the SPDR S&P BRIC 40 ETF (BIK)—had some $50 million in AUM, a level that is usually considered “safe” with regard to closure threat. So it’s not exactly clear why those ETFs have closed.
ETN Closures Stood Out
However, exchange-traded notes were the most notable category for closures, with 29 delisting in 2016. Meanwhile, only 18 launched.
Bloomberg’s Eric Balchunas noted previously that “you have twice as many ETNs going away as entering the market—that’s the opposite of the ratio ETFs are seeing.”
It could be that the issue of counterparty risk makes such products unattractive to the banks backing them, and so they’re looking to clean up their balance sheets with regard to liabilities.
Indeed, that was the widely suggested theory for why Credit Suisse was delisting the VelocityShares 3X Inverse Crude Oil ETN (DWTI) and the VelocityShares 3X Long Crude Oil ETN (UWTI) in early December, despite the fact that the popular products had combined AUM of nearly $2 billion.
Of course, not every firm is worried about that, if the problem of counterparty risk is in fact the issue, as Citigroup stepped up to launch clones of DWTI and UWTI on the day they delisted, albeit at a significantly higher price for investors.
One could even dispute that the delisting of UWTI and DWTI counts as closures since the ETNs continue to trade on the over-the-counter market, but given that their creation/redemption feature is disabled, they really have ceased to be ETNs, so we’re counting their delisting as a closure.
August & September Saw Many Closures
Credit Suisse closed three other ETNs in 2016, but Deutsche Bank and UBS shut down 10 each. After the top three firms for closures this year—SSgA, BlackRock and ProShares—these are the largest closure blocs from any single issuer.
Another interesting feature of this year’s record number of closures is the fact that fully half occurred over the course of two months. August saw more ETF/ETN closures than any other previous month since the launch of the first ETF, with 41 products delisting. September was no slacker either, with 22 closures.
Last year saw a fairly high (though not record-breaking) number of launches—284—so the number of closures (though unusually high) is not a surprise.
“There’s a lag. I’ve noticed the closure activity tends to lag launch activity—peaks and troughs—by one to two years. There’s definitely what I’d consider a saturation of products, and that’s a contributing factor,” said Ron Rowland, who maintains the ETF DeathWatch and is the founder of the investment website/newsletter Invest With An Edge, earlier in 2016. “I think if the launch rate stays high, the closure rate will stay high as well.”