ETFs are closing in record numbers

Closed sign

The exchange-traded-fund industry is cleaning house, with a record 86 ETFs closed in the first nine months of 2012.

With so many ETFs started in the past few years, observers said it is natural for some to close as the market approaches saturation.

The number of closings through the first three quarters is already well beyond the previous calendar year high of 58 ETF closings in 2008. In 2009, 56 funds were closed.

Another 49 were closed in 2010 and 30 more were closed last year.

Matt Hougan, president of IndexUniverse LLC, described the raft of ETF closings this year as part of the fallout from a “baby boom” of new ETFs in 2008 and 2009.

“A bunch of new firms were expanding their offerings a few years ago, and now we're seeing the echo of that,” he said. “A lot of those firms didn't make it in the ETF space because they didn't gain any traction, so they shut down.”

The total number of closings this year was boosted by the shuttering of entire lineups by Russell Investments and Scottrade Inc., which closed 25 and 15 ETFs, respectively.

It isn't unprecedented, however, for money managers to close ETFs in bunches. In 2010, Rydex Investments closed 12 funds, while PowerShares Capital Management LLC and WisdomTree Investments Inc. closed 10 each.

With more than 1,500 ETFs now available, Mr. Hougan called it “simple math” that a larger overall pool will produce a larger number of closings.

Paul Justice, fund analyst at Morningstar Inc., called the rising level of closings a reality of any growing industry.

“This doesn't mean ETFs are suffering,” he said. “It means we're getting more information about what investors are looking for.”

In addition to adapting to investor appetite, the ETF industry differs from the mutual fund industry in that it requires a different kind of marketing effort, where it isn't always easy to track the source of new sales, Mr. Justice said.

“Much of the wholesaling efforts with mutual funds will involve things like trying to get on various distribution platforms,” he said. “But ETFs are traded on an exchange where they are competing with everything else.”

Most of the fallout in the ETF space isn't coming from the “lions in the industry,” such as BlackRock (BLK) Inc. (BLK), State Street Corp. (STT) and The Vanguard Group Inc., which combined represent the majority of all ETF assets.

The stigma associated with closing a fund has subsided somewhat in recent years, Mr. Hougan said.

He recalled, for instance, being on vacation in 2008 when Claymore Group LLC said it would close 11 ETFs.

“I felt like that was a big-enough issue that I needed to interrupt my vacation to pay attention to it,” Mr. Hougan said. “If that happened today, I'd probably just order another Mai Tai.”

Jeff Benjamin is a reporter with InvestmentNews, a sister publication of Pensions & Investments