Experimentation has always been the lifeblood of the exchange-traded product ecosystem, helping to build a market that manages $8.1 trillion in assets across 3,366 products in the U.S., according to data provided by CFRA Research.
But, more recently, creative destruction has taken over as the mantra. Last year, a record 544 exchange-traded products hit the market. At the same time, issuers closed 249 products, second highest to the record 277 closures in 2020.
The flurry of new issuance has included well-established active managers "playing catch-up by both launching new funds and converting traditional mutual funds to exchange- traded funds," said Aniket Ullal, senior vice president and head of ETF data and analytics at CFRA Research.
Of all launches in 2023, 63%, or 343 products, were actively managed, 63% of which invested primarily in equities and 21% invested primarily in fixed income. Conversions, however, have changed the calculus of assessing a successful fund launch. Seventeen fund issuers, including Fidelity Investments, J.P. Morgan Asset Management and Bridgeway, converted a total of 34 mutual funds to ETFs in 2023. Yet only a handful of those funds, led by the $1.1 billion EA Bridgeway Omni Small- Cap Value ETF and the $365 million JPMorgan Equity Focus ETF, managed to attract any significant inflows after conversion.
Some other active products were also a second bite at the apple, of sorts. BlackRock introduced 10 LifePath funds in October, bringing back target-date and in-retirement ETFs roughly nine years after shuttering its first attempts. Collectively, the funds held $33 million at year-end. And 15 years after collateralized loan obligations were dragged through the mud during the financial crisis, PGIM, BlackRock and Panagram Structured Asset Management launched dedicated CLO ETFs, the most successful of which was the $179 million Panagram BBB-B CLO ETF, adding $170 million in net inflows since its January 2023 launch.
While many 2023 launches and closures were calendar-based, such as yearly target maturity bond ETFs or options-based ETFs on a monthly cadence, seven new products didn't even survive the year. Of the rest of the 2023 launches that made it to this year, 218, or 40%, held less than $10 million in assets as of Dec. 31, according to CFRA.
"The pace of launches has been quite intense," said Ben Slavin, global head of ETFs for BNY Mellon Asset Servicing, "but the inability of products to scale can put a strain on the ecosystem."
Slavin said that there is an increasing amount of diligence required, especially for new issuers. "Do they understand the structure? Will their investment strategies fit into an ETF structure? What do their marketing and distribution plans look like? Will they make a reasonable attempt to raise assets?" he asked.
Even established issuers routinely prune their offerings. Invesco, whose ETF portfolio grew through a handful of acquisitions, has eliminated 105 products since 2017. BlackRock, the market leader with over 400 ETF offerings in the U.S., has cut 80 funds.
In a significantly higher interest rate environment than recent years, languishing ETFs become expensive, unmovable product for the trading firms that form the backbone of intraday ETF liquidity and the creation and redemption of ETF shares in the primary market.
"Liquidity provider balance sheets have shrunk," said Slavin, "and an ETF without meaningful assets or trading volume is not something that a market maker can profit from."
Several trading firms contacted for this article declined to comment. Market makers and authorized participants have been avoiding the spotlight amid the expectations of a bitcoin ETP.
In the crowded ETP market, where every basis point of edge matters, even securities exchanges are rethinking their approach to supporting products. The vast majority of U.S. ETPs are listed on the all-electronic NYSE Arca, which has an incentive and monitoring program for so-called lead market makers to facilitate liquidity.
"We help the ETF issuer determine which LMM could be the best fit for their upcoming product suite," said Douglas Yones, head of exchange-traded products at NYSE. "We also spend time educating new issuers to help them understand the role of and expectations they should have for their LMM firm," he said.
A handful of issuers have also moved some listings to the New York Stock Exchange, where floor brokers can help smooth the opening and closing trades. On Jan. 10, nine Strive equity ETFs launched in 2022 and 2023 moved to NYSE from NYSE Arca and Nasdaq listings. In a LinkedIn post, Yones wrote that ETFs switching to NYSE experienced a 43% reduction in trading spreads, to around 17 from roughly 31 basis points due to the additional oversight and judgment from a designated market maker. (Heavily traded products tend to have 1- to 2-basis-point spreads.)
Whether launches and closures will continue apace into this year will largely be a function of the market. CFRA's Ullal notes that a rising equity market, such as 2023, tends to attract more new issues.
