The latest consolidation trend within the ETF business could be indicative of merger and acquisition activity around the corner.
ETF manager FocusShares is closing its doors, Russell Investments is downsizing its ETF operation and Direxion recently announced the liquidation of nine leveraged funds. [My ETF is Shutting Down — Now What?]
“Asset management firms are struggling,” said Paul Justice, director passive fund research at Morningstar, in a recent report. “What it comes down to is it’s no country for new funds.”
The $1.2 trillion ETF industry is still experiencing inflows, with a 2.2% uptick in assets for the moth of July, reports Ron Rowland for ETF Daily News. ETF closures are on pace to pass the number of shutdowns last year. In 2011, there were 38 fund closures, with about 33 ETFs on record to shut down by the end of this month, reports Jessica Toonkel for Reuters. [ETF Fees: More Than Just Expense Ratios]
“It has never been easy to be in this business, but the challenges have changed,” Cukier said. “It used to be that advisors didn’t know what ETFs were, but now there are thousands of ETFs out there and the challenge is how to get the advisers’ attention.”
The three largest ETF providers – BlackRock, State Street Global Advisors, and Vanguard Group – have a stronghold on the industry that has made it tough for the smaller players. In perspective, the three providers account for $1 trillion of the $1.2 trillion industry, reports Jason Kephart for Investment News. [My ETF is Shutting Down – Now What?]
According to Morningstar data, the 3 firms grabbed $70 billion of the $96 billion in industry inflows, or $3 of every $4 invested in ETFs through the end of July. Investors are attracted to the liquidity factor that the larger funds can back up, and the bigger players can offer lower fund fees. [In the ETF Price War, Investors Win]
“If ETFs were more efficiently priced, I’d be more interested in the thinner vehicles,” James DePorre, President of Shark Asset Management said. “But because of the disconnect with the underlying assets, there is little choice but to stick with the more liquid and heavily traded ETFs.”
The bigger providers have assets and trading volume, two qualities that the smaller providers can not come up with overnight. The smaller providers will have to create successful niche products to compete with the bigger providers. For the rest of 2012, there is likely to be more merger and acquisition activity as the smaller players begin to wane, and the evolutionary process takes over.
Actively managed ETFs are a potential growth area for the business. However, several active ETFs have low trading volume and assets so far. [Many Active ETFs Struggle to Survive]
Tisha Guerrero contributed to this article.