Some exchange traded fund providers say reports of ETF deaths are greatly exaggerated.
The “zombie” ETF list includes funds that have low assets and show a dearth in trading volume, which have contributed to speculation that they are next on the chopping block. However, First Trust pointed out that their funds, despite some showing up on the list, provide investors with performing investments.
There is a “dire prediction of massive industry consolidation and ETF liquidations, referencing a handful of recent ETF closures, and citing the ‘ETF Deathwatch’ list which is published by Ron Rowland,” writes Ryan Issakainen, Senior V.P. and ETF Strategist at First Trust Advisors, in a research note.
Ron Rowland’s ETF Deathwatch list includes funds that have traded for more than six months and hold less than $5 million in AUM for three consecutive months. As of February, there are 288 ETFs on Deathwatch, including some First Trust products, according to Invest with an Edge.
“These fears are often presented as evidence that investors should avoid ‘smaller’ ETFs, and stick with funds that meet certain threshold for Assets Under Management (AUM) or trading volume,” Issakainen added.
However, First Trust has not axed any of its funds, despite the low assets and low trading volumes on some products. In fact, most of its ETF products have beat comparable benchmark indices over a three-year period, according to the research note.
“But for those concerned about ETF closures, perhaps there is an equally important criterion that should be considered, namely, which fund company sponsors the ETF in question,” Issakainen said.
If funds do not gather enough assets, fund providers may not find it profitable to keep the ETF. However, larger companies with deeper pockets may patiently wait it out until a fund becomes popular enough to generate sustainable profits.
For instance, this appears to be the case for the eight Global X ETFs that have already been closed down this year, and another eight tentatively slated for closure.
According to the ETF Industry Association, there were 1392 listed ETFs/ETNs as of January 2012, with $1.15 trillion in assets under management.
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.