Many exchange traded fund observers point to low assets under management as a predominant indicator for the future success of an ETF, but there are other factors that affect a fund’s survivability.
“The biggest driver of fund closure in conjunction with low assets was actually the overall strength of the issuer; in other words, the less assets the provider had overall, the more likely it was to close a product (or even an entire line of products),” Credit Suisse analyst Victor Lin said in a research note. [The Number of ETF Closures is Rising]
In contrast, larger providers have deeper pockets to keep products opened without a significant negative impact. [iShares Plans First ETF Closure Since 2002]
Moreover, there is a type of trial period that most fund providers monitor.
“75% of the ETPs that have closed have done so within 2 years,” Lin added. “The patience of a provider to wait for a product to be widely adopted has also diminished over time.”
Currently, international equity ETFs are more at risk, compared to domestically focused stock ETFs. Commodity ETFs are the most at risk, followed by leveraged/inverse fund products. Fixed-income products appear more stable than other categories.
Exchange traded notes, on the other hand, are subject to the credit risk of the issuing bank. So far, only 4 ETNs out of about 250 in the U.S. have been closed due to defaults. While the risk is minimal, potential investors should still know that ETNs are not ETFs and come with different risks.
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.