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The Year of the ETF Closure

Yes, more ETFs and ETNs have closed than in any other year. But it bodes well for investors, with fewer thinly traded products, consolidated liquidity, and greater price competition.

Robert Goldsborough, 11/28/2012

With just weeks left in 2012, several records, of sorts, look like they will be set in the area of exchange-traded product launches and closures.

Totaling up all the exchange-traded funds and exchange-traded notes that have already closed this year and adding those that are scheduled to close before the end of December, we see that at least 95 ETFs and ETNs will end up shuttering in 2012. That would make 2012 far and away the Year of the ETF Closure.

What's more, while the number of ETF and ETN launches thus far in 2012 (165) still far exceeds the number of closures, we find it instructive that this year will end up with the second-fewest new launches in at least six years. Only in 2009, when the financial crisis gave ETF issuers tremendous pause, did fewer (136) ETPs begin trading.

ETF Industry Maturing?
For most investors, the biggest question to ask isn't about the magnitude of the ETP closures, as most ETFs and ETNs that close tend to be small, thinly traded products. Instead, when considering the increasing number of ETP closures, a declining number of new launches, and the widely publicized fee war going on at the broad beta end of the exposure spectrum, it's more reasonable to ask: Is the ETF industry simply maturing?

We would say the answer to that question is, in a word, yes.

It's All Relative
No one would dispute that the ETF industry is continuing to grow. Our data show that assets are continuing to flow into ETFs, with just over $139 billion flowing into U.S. ETFs for the year to date through Oct. 31. Furthermore, some new launches--most notably PIMCO Total Return ETF BOND--have been tremendously successful.

So from our standpoint, these signs of maturation are hardly heralding a decline just around the bend. But it does mean that the days of ETP issuers floating gimmicky products in a rising tide are nearing an end. In addition, we believe the current wave of closures indicates that exchange-traded product providers aren't anywhere near as willing to prop up money-losing funds as they have been in the past. The amount of assets needed in an exchange-traded product for an issuer to break even varies widely depending on the issuer, but let's assume that it's somewhere between $25 million and $75 million. As of Nov. 16, out of 1,445 U.S. exchange-traded products currently trading, some 684 had assets below $25 million. Expanding the field a bit more, we see that a whopping 823 exchange-traded products had assets below $75 million.

Closures are a natural part of the weeding-out process that will continue as the industry matures. Let's compare the 95 ETF and ETN closures already in the books (or scheduled) for 2012 with the 291 distinct U.S. open-end mutual funds that have closed thus far this year, through Nov. 19. With 1,443 U.S. exchange-traded products at present, that means that the industry lost approximately 6.5% of its exchange-traded products this year. That's a lot higher than the 2.7% of U.S. exchange-traded products that liquidated in 2011, for example. But, it could well be the sign of a maturing industry that is thinning out excess products. For perspective, when we look at a more mature investment product industry--the world of U.S. open-end funds--we see that the 291 open-end funds that were liquidated or merged away this year represent roughly 4% of the total number of separate open-end funds.

Robert Goldsborough is an ETF Analyst at Morningstar.
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