This year is proving to be another brisk one when it comes to new ETF launches. With seven months in the books, approximately 120 new ETFs have come to market, pushing the number or exchange traded products listed in the U.S. to over 1,700.
That number seems large, but it is a mere fraction of the total number of mutual funds trading in the U.S. Plus, a case can be made that investors benefit from having multiple options to choose from, but some market observers argue too many new ETFs can be a sign that specific niches being addressed by new funds are sign those market areas are in trouble.
“Between 1999 and 2000, just as the dot-com bubble was peaking, managers launched 136 technology funds and ETFs, according to Morningstar. Then they closed 31 in 2002 as the sector bottomed,” reports Lewis Braham for Barron’s. “The pattern is similar in other sectors: In 2007, 37 U.S. and global real estate stock funds were launched right before the mortgage crisis crushed the sector; 16 closed in 2009 as the sector was rebounding. Similarly, 10 energy master-limited-partnership funds launched last year as that sector peaked.”
While the merits of ETF issuers’ timing are likely always make for good cocktail party conversation, what cannot be refuted is that as the industry matures, it is becoming increasingly harder for new ETFs to immediately gain traction.
Last year, 205 exchange traded products debuted in the U.S., but in a sign of the increasingly competitive fight for investors’ attention assets, by late in the year, close to half 2014’s new ETFs had less than $10 million in assets under management. Some of this year’s new ETFs have found rapid success, including the SPDR DoubleLine Total Return Tactical ETF (NYSEArca: TOTL), CSOP FTSE China A50 ETF (NYSEArca: AFTY) and the iShares Exponential Technologies ETF (NYSEArca: XT). [Fast Success for Some new ETFs]
However, few new ETFs quickly reach the acclaim and asset-gathering proficiency of a TOTL, PureFunds ISE Cyber Security ETF (NYSEArca: HACK) or First Trust Dorsey Wright Focus 5 ETF (NasdaqGM: FV).
That is to say there are no guarantees on any ETF’s success. Since the dawn of the U.S. ETF business, over 500 funds have closed.
“To put this number in perspective, a grand total of 2,207 ETFs and ETNs have been listed on US exchanges. The 500 closures represents a 22.7% mortality rate,” notes Ron Rowland of Invest With an Edge.