Why ETF and ETN Closings Aren’t Cause for Alarm

Exchange traded funds (ETFs) and exchange traded notes (ETNs) have not been immune to the global financial crisis, as a number of funds have closed their doors in the last year or so.

According to State Street, 58 exchange traded products have closed last year and another 30 or so have stopped trading over the past three months.  Will Swarts of Smart Money suggests the following reasons why the industry is getting slammed:

• A frenzy of launches of ETFs and ETNs over the past decade.  According to the Investment Company Institute, there were about 80 exchange traded products in 2000 and swelled up to 737 at the end of 200.
• Industry assets and trading volume are top heavy and dominated by a few funds. The 17 most active funds account for 74% of the industry’s activity.
• As ETFs have grown more popular, they have been scrutinized for their pricing, ability to accurately track the returns of their underlying indexes and ability to survive one of the most chaotic markets that we have seen.

The good news is that it isn’t all gloom for exchange traded products. ETFs have been stealing assets from mutual funds in record numbers, showing positive cash flows and still remain an excellent investment tool offering exposure to hard to access markets, tax efficiency, low cost and intraday trading.

Additionally, there could be several reasons why an ETF closes. It could have been introduced at the wrong time, could have been a poor concept, or could have been marketed poorly. Keep in mind that every industry has had its fair share of failed products. ETFs are far from being on a death watch and will be here for a long time to come.

The mutual fund industry continues to lose assets: in 2008, investors took $235 billion from non-money market mutual funds while adding $175 billion to ETFs. ETFs are poised to quicken the pace even more, says Robert Dubois for Index Universe.

Global assets in ETFs continue to hold strong despite the market licks: At the end of January 2009, there were 1,602 ETFs with 2,683 listings. Assets stood at $658 billion from 85 providers on 42 exchanges, Barclays Global Investors reports. Year-to-date, assets have fallen by 7.3% and the number of ETFs has increased by 0.8%.

Kevin Grewal contributed to this article.