The ETF Deathwatch is no place for an exchange-traded product to live, but at least the neighborhood is crowded with nearly 500 ETPs on the list. All-time product closures passed 600 in mid-July, according to Ron Rowland, editor and founder of newsletter Invest with an Edge, who maintains the ETF Deathwatch.
Indeed, as the U.S. ETP market approaches 2,000 offerings and $2.5 trillion in assets, fund sponsors continue to take a measured approach to culling their herds.
“The math is quick on whether a fund is worth keeping open,” said Dave Nadig, director of exchange-traded products for Norwalk, Conn.-based FactSet Research Systems Inc. “But the bigger question, for some issuers where the cost of maintaining a product is so marginal, is it actually worth shutting down?”
In its ETF analysis, FactSet assigns products a “fund closure risk score.” Currently, 33% of all outstanding offerings are at a medium to high risk of closure, according to its analysis as of Aug. 10.
While the largest and most liquid ETPs — those most likely to be used by institutional investors — don't typically close, the risk of closure for more niche and thinly traded strategies should always be considered before investing.
“Popularity of a niche strategy can go both ways,” Mr. Nadig said. “Could some factor strategies become too big to be run effectively? Will there be enough liquidity in both the ETF and the underlying holdings to support the increase in trading that comes with more assets? On the other side, it can be hard to run a product well with few assets.”
Mr. Nadig added that issuers have to consider both the economic impact of running an ETF to their own bottom lines and the more qualitative assessment of whether they can run it well.
“It's a real risk for an ETF to get too large in a strategy that is too thin,” said Reggie Browne, senior managing director, ETFs, at Cantor Fitzgerald in New York.
Mr. Browne works with brokerage clients on executing ETF trades and also serves as a market maker for ETFs on NYSE Arca, the Nasdaq ETF Market and Bats Global Markets, the three primary listing exchanges in the U.S.
While the exchanges have been focused on reducing listing fees upfront and building incentive programs to encourage competitive quoting, Mr. Browne said he thinks the market would be well served by higher initial listing fees that drop as a fund takes on more assets.
“The SEC should press the exchanges to review continued listing standards,” Mr. Browne said. “When the cost of capital to launch an ETF is borne by the sponsors, the ETF industry will be in perfect competition with itself.'' Right now, “the cost of failure is too low.''
The exchanges should consider asset levels and fund age as ongoing metrics for listing, Mr. Browne added.
The iShares unit of BlackRock Inc. has closed a handful of exchange-traded funds over the past three summers and has 10 set to close after trading on Aug. 23, including two funds that at the time of the closing announcement each held more than $50 million in assets, a dollar level long assumed to be the low-water mark for a self-sustaining product.
Those closures weren't surprising. BlackRock regularly re-evaluates its ETF lineup. But an early August announcement of 12 fund closures by State Street Global Advisors carries some significance.
SSgA hasn't been as active in closing funds, and the company's action, which coincides with limited uptake of new products broadly, reveals a product market coming to grips with its own maturity.
At the time of the announcement, five of the funds to be closed by SSgA on Aug. 24 each held more than $50 million in assets.
“Product closure is part of ensuring a healthy business,” said Nick Good, senior managing director and co-head of SSgA's global SPDR business in Boston. “We have to stay focused on the overall customer experience. If a product is small and an investor can't get a trade done or trading spreads are too wide, it can be difficult to narrow the spreads and ensure a good experience.
“Trading is part of the ETF experience,” said Mr. Good. “We don't do this (close funds) lightly and it doesn't happen overnight, but it is part of the ongoing assessment of our product lineup and where can we compete.”
Among the largest ETF issuers, BlackRock has 10.6% of its 331 offerings at medium to high risk of closure, including the recently announced closures, according to FactSet. BlackRock had $929 billion in ETF assets under management as of Aug. 11, according to XTF Inc.
SSgA had 21.7% of its 152 offerings at medium to high risk of closure and $403 billion in ETF assets under management.
Vanguard Group, which has largely avoided offering niche or trendy products that don't also fit with traditional mutual fund distribution, has 70 ETFs and $569 billion in assets under management and no funds at risk of closure, according to FactSet.