With over 1,600 products on the market with $1.9 trillion in assets under management, the exchange traded fund industry continues to grow, but some investment ideas will inevitably fall through the cracks.
Direxion is the latest ETF provider to announce ETF closures, along with ALPS, iShares and PIMCO. Given the recently announced closures, over 50 ETFs are expected to be delisted so far this year. In comparison, about 70 ETFs were shuttered in 2013. [Direxion to Shutter Five Leveraged Bear ETFs]
Nevertheless, the closings are part of a healthy industry, reflecting providers’ responsiveness to investors’ needs, writes Teresa Rivas for Barron’s. [iShares Will Close 18 ETFs]
Wells Fargo analysts Danie Brown and Mariana Bush point out that the exchange traded product universe, which includes ETFs and exchange traded notes, has expanded from 145 products with $179 billion in assets to 1,613 products with $1.9 trillion over the past decade, or an asset compound annual growth rate of 26%.
“Along with this rapid growth there have been a reasonably-large number of ETP closures,” the Wells Fargo analysts said in a note. “However, we believe this is a natural and healthy pruning process that will more than likely continue as the ETP industry matures.”
Since 2008, over 400 ETPs have closed as the products were unable to garner the necessary number of investors and assets to sustain operations.
Closures help promote greater competition. The ETF industry is top heavy, with BlackRock (NYSE: BLK), State Street (NYSE: STT) and Vanguard Investments dominating market share. However, smaller companies are crafting specialized ETFs that track nontraditional benchmarks as opposed to beta, market-cap index ETFs.
Additionally, closures provide a natural weeding-out process, which has helped increase price competition and signal to providers the level of saturation in a given investment area.
Investors shouldn’t be scared off by ETF closures. In the event a firm shutters an ETF, investors have one of two choices: sell your position before the final trading date, or wait for the fund to close and the check to come in. This can create tax consequences, and no investor likes surprises.
Investors should note that over an ETF’s last few days of trading, sellers will be scrambling to dump their positions, which can lead to hefty losses. Due to the disparate number of sellers to buyers, the bid/ask spread tend to widen. Potential sellers should try to set up limit orders to sell at a given price so that one won’t get caught unawares.
In rare cases, those who opt to hold until the fund is liquidated may also be billed for the costs of closing, or “termination fee,” which includes legal fees and administrative costs – ETFs may raise the expense ratio retroactively.
For more information on the ETF industry, visit our current affairs category.
Max Chen contributed to this article.