Simple Equation When It Comes To Assets
The overall direction is clear: The lower the assets at the end of year one, the higher the chance of closing, or of bumbling along at low asset levels. The opposite also holds true: The higher the assets at the end of the first year, the greater the chance of the fund thriving in years to come. There is greater mobility among funds that gathered mid-range asset levels in their first 12 months.
The next chart shows the results for every starting asset band. Current asset ranges are shown on the x-axis (horizontal), subgrouped by 12-month asset levels. The y-axis (vertical) shows the percent of funds from each 12-month asset band that have landed in their current band. Put another way, the x-axis shows where the funds are now while the y-axis shows where they were at their first birthday.
(For a larger view, click on the image above)
In the past few years, organic success in the ETF market has become nearly impossible. Of the ETFs launched in 2017 and 2018, only nine have amassed $1 billion or more in assets. Notably, seven of the nine owe their success to in-house investments.
The Principal U.S. Mega-Cap Multi-Factor Index ETF (USMC), is a perfect example. As of September 30, 2018, 85.47% of all fund shares were held by Principal Global Investors, which manages Principal’s Strategic Asset Management Suite.
Natural Success Hard To Come By
Of the two non-issuer-owned ETFs that garnered $1 billion or more, only JPMorgan Ultra-Short Income ETF (JPST) is a natural success, with funds coming in from a variety of unaffiliated investors. The other, the Communication Services Select Sector SPDR Fund (XLC), is more of a me-too product.
XLC was born from the 2018 GICS [Global Industry Classification System) reorganization that carved out a new sector. Because XLC drew from both the technology and consumer discretionary sectors, SSGA could not simply spin it off as they did with the Real Estate Select Sector SPDR Fund (XLRE) in the previous GICS re-organization. XLC is the 11th Select Sector SPDR.
The next tier of 2018 ETF launches, amassing between $500 million and $1 billion (depicted in dark green in the above chart), told the same story. Funds like the Hartford Total Return Bond ETF (HTRB) owed their livelihood to parent company-driven investments. The Hartford Checks & Balances mutual fund held 11,051,000 of HTRB’s 11,600,000 shares as of November 30, 2018.
The next tier down – funds with assets between $100 million and $500 million, corresponding to the light green columns in the chart above – split evenly between funds that organically captured market share, and those that have been supported by a parent company.
The days of blockbuster launches that appeal to a wide swath of independent investors seem to be behind us. There has not been a TOTL (SPDR DoubleLine Total Return Tactical ETF), FV (First Trust Dorsey Wright Focus 5 ETF), or HACK (ETFMG Prime Cyber Security ETF) for four years. The gates to opportunity in the ETF industry are beginning to rust shut to all but those with in-house assets to cannibalize.
The bottom line is that over the past decade, and especially during the past few years, the prospects for launching successful new ETFs dimmed significantly, except for those able to redirect in-house assets to these newer, and likely cheaper, products.
At the time of writing, the author held no positions in the securities mentioned. Elisabeth Kashner is director of ETF research and analytics for FactSet. Check out Elisabeth Kashner’s new e-book, “Uncover The Key To ETF Tax Efficiency.”