The ETF market is a confusing place at the moment.
ETF net inflows are on a pace to shatter the all-time inflow record set four years ago. At the same time, however, more money managers are exiting, and entering, the arena.
Net inflows into U.S. exchange-traded funds totaled $130.9 billion in 2012 through Sept. 24, according to BlackRock Inc.
This surpasses net inflows of $117 billion in all of 2011, $123 billion in 2010, and $119.4 billion in 2009. If the trend continues, 2012 net inflows would break the record of $175.7 billion in 2008, according to data from BlackRock and the ETF Association, Philadelphia.
Yet within a two-week period in August, Russell Investments announced it was closing its 25 passively managed ETFs, just 15 months after it launched the offerings, while FocusShares LLC, the ETF unit of brokerage firm Scottrade Inc., pulled the plug on its 15 ETFs, just 18 months after they were launched. In addition, fund manager Direxion said it would close nine of its 50 ETFs.
None of the shuttered funds had reached the $100 million mark, a commonly used measure of ETF profitability. Russell's suite of ETFs had gathered a total of $310 million, while FocusShares' 15 ETFs had a total of $100 million.
All three firms cited problems getting significant assets as the reason for the closures.
“We are in a difficult financial environment,” said Deborah Fuhr, a principal in the London-based ETF research firm ETFGI. “Look at the bank and brokerage industries and how many people are cutting head count. Financial firms are asking, "Where should I be spending if I have limited resources?'”
Yet others are lining up for their turn at bat. Boston-based Fidelity Investments reportedly plans next year to offer active ETFs based on its “Select” line of industry-focused equity mutual funds.
Fidelity spokesman Jeff Cathie said the company has formed a division to develop investment offerings based on the sector funds, but refused to say they would be ETFs. He said such an announcement would be “premature.”
Still, the new division is being headed up by Anthony Rochte, who, as a senior managing director at State Street Global Advisors, helped run the world's second-largest lineup of ETFs.
Fidelity would be just the latest in the line of large, established money managers that want to enter the ETF business, joining Legg Mason Inc., T. Rowe Price Group Inc. and John Hancock Financial Services Inc., among others.
Two trends are occurring simultaneously: Bigger money managers are staking a claim to the ETF marketplace; and smaller firms are struggling to stay in business, said James Pacetti, an ETF industry consultant with S-Network Global Indexes, LLC, an index provider in New York.
“You are going to have a big shakeout with the smaller guys who have no distribution,” Mr. Pacetti said, declining to name any firms.
ETFGI statistics show the 13 smallest U.S. ETF providers had a combined AUM of $1.073 billion as of Aug. 31, a minuscule number in the $1.178 trillion U.S. ETF industry.
The smallest providers as of Sept. 24, according to the BlackRock report, include tiny firms and global banks. They are AlphaClone LLC, with $3 million; Citigroup Inc., $4.4 million; Huntington Asset Advisors, $13.6 million; Factor Advisors LLC, $15.5 million; and Arrow Investment Advisors LLC, $17.6 million.
But Ms. Fuhr said niche providers have found enough traction with their ETFs to be successful, or are willing to endure money-losing years on the hope of eventually turning a profit.
“Many firms are going to stick with ETFs for the long run, but we are probably going to see some consolidation,” she said.