Two ETF providers recently calling it quits underscores the fact that the competition in the industry is very tight, especially in equity-based index funds. Also, smaller firms need a strong sales strategy and distribution to flourish, reports Ari Weinberg for Forbes.

The latest wave of exchange traded fund closures are the result of not having enough assets under management.

The rule of thumb in the ETF business for new products is three years – the fund has three years to gather assets and track its benchmark well – until liquidation or consolidation takes place, Weinberg reports. [Alternative ETFs May Find Home in Separate Accounts]

Russell Investments is closing all its ETFs except one, and Scottrade’s FocusShares is exiting the business altogether.

Dustin Lewellyn of Golden Gate Investment Consulting in the Forbes article chalks both of the failures to a mutual-fund term of art: “distribution strategy.” [My ETF is Shutting Down – Now What?]

“Providers that cannot or do not differentiate themselves are not able to extract the necessary market share from established providers,” Bernie Thurston of DeltaOne Solutions said. [ETFs and Financial Advisors]

One example of a newer entrant into the ETF business that has done well is Charles Schwab. The provider entered into the market with precise offerings and was able to do so with a large distribution platform. The provider now manages $7.2 billion within their low-cost, broad-based ETF choices. Schwab’s ETFs trade free online for their in-house accounts.

Christian Magoon for Nasdaq reports that there are three major categories where an ETF can fail – product development, marketing and distribution.

Tisha Guerrero contributed to this article. 

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