Record numbers of exchange traded funds have closed so far this year, underscoring the difficulty many of the investment vehicles face in gaining traction among investors, despite the industry’s overall boom in popularity in recent years

July 7, 2013 2:11 pm

ETFs close in record numbers despite industry boom

By Arash Massoudi and Tracy Alloway in New York

Record numbers of exchange traded funds have closed so far this year, underscoring the difficulty many of the investment vehicles face in gaining traction among investors, despite the industry’s overall boom in popularity in recent years. About 117 ETFs have shuttered in the first half of this year, according to data collected by independent research firm ETFGI, easily outpacing closures in the same period in previous years. Out of 4,849 exchange traded products on the market, more than 60 per cent have less than $100m in assets, suggesting that more closures could take place in the coming months.“Part of it is the fact that we had a record amount of ETF launches in the past couple of years,” said Andrew Lo, professor of finance at the MIT Sloan School of Management.

Investors, particularly in the US, have flocked to ETFs, helping create a $2tn market that has revolutionised asset management and challenged the mutual fund industry.

The funds, which give retail and institutional investors instant access to a multitude of assets, have also become profitable cash cows for many of the financial companies which sponsor and support them.

Some of these financial companies have been turning to increasingly unusual assets and fund structures as they seek to grow their ETF offerings and attract new money. Many such funds are now being quietly closed after failing to attract enough investors to make them profitable for their issuers. Regulators have also cracked down on more esoteric fund structures as they seek to protect investors.

“Firms are getting rid of products that are not getting to that critical mass or that they think won’t work in the future,” said Deborah Fuhr, managing partner at ETFGI. Ms Fuhr said that ETFs generally need to reach $100m in assets in order for their sponsors to break even on the funds.

Deutsche Bank, one of the largest ETF providers in Europe, on Friday became the latest company to prune its offerings. The bank said it was shuttering 36 exchange-traded products (ETPs), with total assets of about €110m, in one of the biggest ever single series of closures by an ETF provider.

The ETP “market in Europe has reached a point of development where it makes sense for us to review our overall product line-up to bring it in line with current and expected future demand,” Manooj Mistry, Deutsche’s head of ETPs, said in a statement.

The closures include the “db x-trackers Stoxx Europe Christian” ETF, which seeks to replicate the performance of European stocks with Christian values, and the “db Monthly Leveraged Gold” exchange-traded commodity, which reflects the amplified performance of gold futures and has almost halved in value this year.

“ETFs, like many other financial innovations, have been very popular over the past few years, and have grown very rapidly,” said Mr Lo. “As we’ve seen over the last five or 10 years, sometimes financial innovation can get ahead of itself. When businesses get a little too frothy we often don’t stop to ask the questions we need to ask to assess the risks.”