This year has been a wild ride for the ETF industry, with launches in the first three quarters actually exceeding the number of launches in all of 2020.
Keep in mind that 2020 was a pretty unusual year, with the pandemic and related market crash holding up many launches in the first half, before the floodgates opened and drove new ETF rollouts to a record level of 318.
Despite the year’s unusual (and disastrous) circumstances, it still managed to set records for not just launches but closures as well.
This year has been just as dizzying, but in a different way. At the quarter's close, we had a total of 332 launches, breaking 2020’s record-setting number in just nine months. Since that number averages out to roughly 110 launches per quarter, we could easily see 400 launches by the end of the year.
Active Takes Over
A lot of those launches have come from the active side of things. Consider that in 2018, before the ETF Rule and when defined outcome ETFs were just getting started, there were 67 active launches. That’s out of a total of 267 launches for the whole year. That represents a quarter of all launches in 2018.
Now consider that out of the 332 launches in the first three quarters of 2021, there were 197 active ETFs in the mix, or 59% of all launches year-to-date. That’s a huge difference in just a few years. And it shows that the shape of the ETF industry is changing before our eyes.
Of course, there are a lot of factors playing into that. For one thing, the rise of defined outcome ETFs should not be overlooked, as all are classified as active and the first ones launched in 2018. Since then, roughly 130 ETFs providing buffered performance have entered the marketplace.
And then there’s the ETF Rule, which passed in 2019. The provision that allows custom baskets for actively managed funds has enticed more than a few active managers into the space. We’ve seen an influx of first-time small issuers in the years since.
Finally, the approval of nontransparent actively managed models has also contributed to the surge in active launches on a smaller scale. Twenty such funds launched in 2020, while another 22 launched in the first nine months of this year. But starting in 2020, the number of active launches surpassed the number of passive launches for the first time.
With a recent SEC rule change that allows for custom baskets for nontransparent actively managed ETFs to list on the NYSE Arca (and other exchanges sure to follow), the proportion of actively managed launches is likely to rise even further.
Dramatic Fall In Closures
Last year was notable for its dramatic increase in closures, with 275 ETFs shutting down. Keep in mind that even before COVID disrupted the markets, there were more than 40 scheduled closures that completed in February, and then more than 30 leveraged ETFs and ETNs closed in the wake of the March crash.
This year, closures are a much sleepier category, with only 41 having completed so far compared to 200 by this time last year. Although we have already blown past all launch records this year, closures are notable mainly because this is the fewest we’ve seen in about a decade. So far, only another eight are scheduled to complete in the fourth quarter.
Given that we’ve had several annual closure records broken in recent years, it’s not shocking that there’s a slowdown. The dead wood has likely been pruned.
Contact Heather Bell at [email protected]