ETF Closures Surge as Hot Ideas Cool Off

Exchange-traded fund closures are jumping as investors lose interest in meme and other so-called thematic ETFs, while at the same time the numbers of new fund launches appear to be little-changed.

Closures jumped 52% to 243 so far this year, compared with 159 in 2022, according to Bloomberg. Bloomberg reported that about 430 funds have launched so far this year, which it called a record. etf.com reported last year that 431 opened in 2022.

As ETF issuers continue to look for markets not addressed by already existing funds, a handful of niche ideas have had a short shelf life. Thematic funds, which largely capitalize on trendy fads, have often failed to pan out. For example, the Roundhill MEME ETF (MEME), which aimed to capitalize on the meme-stock retail trading trend, is set to liquidate this month after it failed to bring in significant inflows and posted an abysmal performance record.  

“The large number of closures this year are the result of the large number of launches in recent years,” explained etf.com analyst Sumit Roy. “Not every fund idea is going to gain traction with investors and those that aren't profitable for their issuers tend to be shut down eventually."

Thematic ETFs Struggle  

While retail traders had a huge presence in the market during the pandemic, the dynamic has shifted. Many investors were trading online during COVID-19, but day trading has dropped off as more regular work scheduled have resumed, according to Deborah Fuhr, head of research firm ETFGI. 

Thematic funds also have a popularity cycle. When the specific theme or trend loses some of its buzz, many investors realize those niche ETFs are not necessarily long-term investment strategies, said ETF analyst at Morningstar Bryan Armour.

Investors also fail to time their thematic investments well, according to Morningstar. A recent study from the firm found that while global thematic funds have gained about 7% overall over the past five years, investors have seen only about 2.5% of those gains reflected in their portfolio. 

“It's important that anyone bringing products to market makes sure that there are investors that want it,” Fuhr said. “Some of the thematic products have struggled because of the performance of securities within them."  

Contact Lucy Brewster at [email protected].