Exchange-traded fund issuers and acolytes like to flaunt significant figures — nearly $3 trillion in assets under management globally, $2 trillion in the United States — but the industry is not exactly crowing about a recent milestone.
With the shuttering of five ETFs by Deutsche Asset and Wealth Management on May 18, exchange-traded product issuers in the U.S. have now closed 500 products: 430 ETFs and 70 exchange-traded notes. Of those, a handful were designed to self-destruct: target-maturity bond ETFs and ETNs with set triggers. The rest, however, were abandoned or died on the vine.
With 1,707 ETPs listed in the U.S. today, Ron Rowland estimates at least 315 more ETFs and ETNs, or 18% of current products, are still at risk of closure because of limited assets and trading. Mr. Rowland tracks the dynamics of the ETP market, including closures and the “ETF Deathwatch,” at his website, Invest with an Edge.
Still, the long-term survivorship rate of ETPs is around 75%, higher than recent, separate studies from Dimensional Fund Advisors LP and Vanguard Group Inc., which estimated 15-year survivorship rates for traditional mutual funds in the U.S. of between 42% and 54%.
Marginal products, those with an asset level unable to support the cost of managing the fund (or note) over the long term, are the ones that tend to close. On occasion, some funds close because of a shift in issuer strategy. Both DeAWM and BlackRock Inc.’s iShares unit recently conceded that target-retirement-date ETFs were not fit for intraday trading, despite the overwhelming success of non-ETF target-date strategies within defined contribution plans.
Market observers, including Mr. Rowland, argue that fund closures are part of a healthy product ecosystem. Some useful lessons and stories also have come out of the closures to create a stronger, more vibrant product market.