ETFs Culled After Investor Apathy Spurs Record Liquidations
More U.S. exchange-traded funds and notes are being liquidated than ever before, victims of investor apathy after their ranks increased threefold since 2008.
At least 91 funds with names like “Sector Rotation” and “BRIC Bull 3X” that never caught on will close in 2012, the most ever, after Russell Investments withdrew 25 last month, data compiled by Bloomberg show. Direxion Funds, FocusShares LLC and Guggenheim Investments shuttered products that attracted less than $36 million, the data show.
ETFs are closing after their number tripled to 1,450 in the past five years and assets expanded 111 percent to $1.3 trillion, outpacing the 11 percent increase for active managers. While funds disappear all the time, sponsors are giving up on more of them amid a broader withdrawal by individuals from equity markets. Competition has squeezed smaller funds after BlackRock Inc. (BLK) cut fees and the five-biggest securities amassed 25 percent of the industry’s assets.
“There’s been much made of the shockingly high pace of ETF launchers,” Michael Iachini, managing director of ETF research at Charles Schwab Investment Advisory, said by telephone. Charles Schwab Corp. has $1.89 trillion in client assets. “With that comes the realization some products get launched and don’t really find investors who want to buy them. In order to succeed in the ETF space, a product has to either be first or better.”
The culling comes even as the most successful ETFs attract more money than ever. About $211 billion was invested with them between the start of 2011 through September his year, while $126 billion was added to equity and fixed-income mutual funds, according to data compiled by the Washington-based Investment Company Institute.
The Standard & Poor’s 500 Index snapped a two-day drop today, adding 0.2 percent to 1,379.85 in New York today.
Daily trading in ETFs, which change hands on exchanges and are priced in realtime, dropped to 787 million shares in August, the lowest in four years, data compiled by Bloomberg show.
ETFs are backed by assets in an underlying basket and ETNs are unsecured bank debt supported by their issuer’s credit. Providers of the securities create and redeem shares based on investor demand and their prices usually track an index.
Russell, the creator of stock-market gauges bearing its name, announced on Aug. 17 that it would liquidate 25 of its ETFs. Some of the delisted funds targeted stocks with characteristics such as high or low volatility, beta, or specific price-earnings ratios. They included the Russell 1000 Low Volatility ETF, which had about $32 million, and the $10 million Russell High Dividend Yield ETF.
FocusShares, a subsidiary of Scottrade Financial Services Inc., closed all of its funds on Aug. 17, citing a lack of market interest. The St. Louis-based company stopped operating funds such as the U.S. Market Index and the Large Cap Index.
Guggenheim Investments announced in March it would close five of its ETFs, including its Ocean Tomo Growth Index ETF and Sector Rotation ETF. The firm is a part of New York-based Guggenheim Partners LLC, which oversees about $130 billion.
Since the first ETF, the SPDR S&P 500 ETF Trust (SPY), was created in 1993, the industry has expanded into securities tracking fixed income, commodities, emerging markets, and currencies and tapped derivatives to create products that deliver inverse or multiplied returns of an index.
“What isn’t there an ETF for?” Mark Travis, chief executive officer of Jacksonville Beach, Florida-based Intrepid Capital Management Inc., which manages $1.3 billion. “There are so many different purveyors of them now, it’s probably hard to get attentions focused and get the scale needed to make some viable business propositions,” Travis said in an interview at Bloomberg’s New York headquarters last month.
The last time so many exchange-traded products were liquidated was in 2008 and 2009, when providers shut 56 securities each year during the worst financial crisis in seven decades, according to data compiled by Bloomberg. Forty-six of the securities were terminated in 2010 and 27 were withdrawn last year, the data show.
Direxion closed nine of its leveraged ETFs, which use derivatives to magnify index returns or amplify moves in the opposite direction, on Sept. 5. The company overseeing $7 billion shut funds including the Latin America Bear 3X Shares Fund and the BRIC Bull 3X Fund. Both had less than $4.2 million invested, according to data compiled by Bloomberg. Seven of the liquidated ETFs were designed to deliver the inverse return of an index.
“When you get to a narrower asset class or sector, it’s much harder to generate interest in a bear fund,” Andy O’Rourke, Direxion’s chief marketing officer, said by phone. “These are trading tools, so they primarily do better when there are high volume and more activity to be trading around.”
Competition is intensifying among ETF providers. BlackRock, the world’s largest asset manager and provider of ETFs, said last month that it would cut fees for six ETFs and create four new ones. Blackrock Chairman Laurence Fink said in September that the firm was seeking to lower fees for “large, liquid, core types” of ETFs.
Vanguard said last month it will drop MSCI Inc. as the benchmark provider for 22 index funds to lower costs for shareholders. In September, Schwab cut fees for its proprietary ETFs by an average of 40 percent. There are more than 125 products pending listings globally, according to Bloomberg data.
The SPDR S&P 500 ETF Trust, known as the SPY, is the largest U.S.-listed ETF with $108.4 billion and the SPDR Gold Trust (GLD) is second with $73.8 billion, according to data compiled by Bloomberg. The Vanguard MSCI Emerging Market ETF, iShares MSCI EAFE Index Fund (EFA) and the iShares MSCI Emerging Markets Index Fund (EEM) are the next biggest, holding at least $37 billion each.
“You can be successful being a smaller provider,” said Deborah Fuhr, the co-founder of London-based research firm ETFGI LLP and former global head of ETF research at BlackRock, said by phone. “But many people think if they’re going to enter a business, they want to be one of the top players, and breaking into that top three is something that’s challenging.”
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