5 Notable Themes Among ETF Closures

No one in the ETF industry does data quite like ETF.com, which is why I love their free resources for investors. It’s one of my “go to” spots when researching industry trends and investment ideas.

In the course of this weekly analysis, I stumbled upon a list of all ETF closures by year dating back over a decade. You can view the complete list here. After sorting and examining the results, I was able to compile numerous observations and common characteristics for funds that are apt to be shut down.

From a general standpoint, the war of attrition in the ETF world is still alive and well. 84 funds have been shut down so far in 2016. That compares with the launch of 194 new funds over the same time period.

This structured elimination count through the first three quarters of 2016 appears to be on track to beat the 100 funds that were closed last year. The overall number of fund closures seem to fluctuate from year to year based on market performance, fund company decision-making, and investor appetite.

Although the trend is somewhat choppy, it does appear that fund closures are slowly on the rise as more offerings are introduced.

The attrition process may seem like a loss of menu offerings for investors. However, this culling of the herd is actually quite healthy by eliminating funds that are not well received by the investment public at large. Often times the funds that are shut down suffer from poor performance, high fees, or an embedded design ailment. The following are some of the most common themes I found when reviewing the list of cancellations.

1. Exotic Strategy – Sometimes an ETF is released in such a small and esoteric category that there isn’t a wide enough pool of investors interested in accessing it. This leads to slow or no growth in assets under management and ultimately a shut down in the fund. That may have been the case with the untimely demise of the ProShares CDS North American HY Credit ETF (TYTE), which sought to track the price action of credit default swaps. This narrow category is something that only sophisticated investors would likely pursue and those who do can probably achieve similar results without the cost of investing in an ETF.
2. Serially Underperforming Category – The last five years have been difficult for commodity-based funds and emerging market countries. As a result, many ETFs in these categories have been shuttered. Investors lose patience with underperforming asset classes and ultimately exit them for greener pastures. This may have been the case with the Global X Brazil Financials ETF (BRAF), which was closed last year as returns suffered.
3. Flawed Concept – Some ETFs look great on paper, but fail to perform up to expectation under a real life trading environment. Case in point is the combination of the AccuShares Spot CBOE VIX Up Shares (VXUP) and AccuShares Spot CBOE VIX Down Shares (VXDN). These funds were created as a solution to the inefficiencies of tracking VIX futures indexes. Nevertheless, they suffered from a number of design flaws and weren’t able to garner enough assets to continue operation.
4. Late To The Scene - Being first to market in a specific category of the ETF world is a very big advantage. ETF investors are oddly drawn to the oldest and largest funds in their class, even if they aren’t the best performers or have the lowest fees. Follow-up funds in the same segment aren’t easily guaranteed to steal assets, even if they offer an attractive value proposition. Examples of this phenomenon litter the list of ETF closures in crowded fields such as low volatility, dividend investing, and even fixed-income.
5. High Fees – If there is one characteristic that can present an obstacle to success in the world of ETFs, it is high management fees. Investors have become much sharper in discerning the drag of fees on their returns and directing capital to funds with the lowest embedded costs. That is why many funds in the active management, futures, leverage, and multi-factor categories fail to gain traction. They simply don’t offer a compelling advantage versus passively managed index funds that are easy to understand.

The bottom line is that not every ETF strategy is cut out to make it over the long-term. Some funds fail simply due to timing, poor luck, or lack of resources to spread awareness of their existence. Narrowing the list of acceptable funds down through a Darwinian process creates a better experience for ETF investors and the industry overall.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.