Closures Part of ETF Industry's Evolution
The pace of ETF closures has quickened in 2012. With more than 40 ETF closures already on the books and more on the way, 2012 will see the largest amount of closures in the burgeoning industry's still young life.
Not surprisingly, the issue of ETF closures has provided fodder for critics of the industry. As the number of closures has risen, reaction has been palpable. Queries have ranged from the benign, such as investors wondering if their ETFs are vulnerable to closure, to the implication that this year's elevated number of ETF departures represents systemic risk to investors and the industry at large.
There is another side to the story and one that requires examining the evolution of the ETF business.
"Yes, we're on track for the highest closure rate ever in 2012, but we'll comfortably exceed 200 launches this year," said Sundrawn Thomas, Managing Director and Global Business Head, Exchange-Traded Funds Group at Northern Trust. Thomas made the comments in an interview with Benzinga at the Morningstar ETF Conference in Chicago.
Thomas highlights the evolution of the ETF business and cautions that investors need to consider the number of closures as a percentage of outstanding funds.
"In 2003, just 13 new ETFs came to market, in 2005 the number was 49," Thomas said. "The number was 300 last year. Look at how many new ETF sponsors have come into the space. Look at that backdrop and we'd naturally expect a larger number of new product launches and closures."
In 2006, there were just 16 ETF sponsors. Since then, that number has nearly tripled. While forecasting how many ETFs and ETNs will be shuttered in a given year is a tricky task, many analysts choose to point to low asset and low volume products as vulnerable to closure.
"Time in the market has to be considered," Thomas said. "Many ETFs that are talked about as closure candidates are only 12-18 months old, so it is not unreasonable to expect low AUM totals."
Thomas noted that of the roughly 300 ETFs introduced last year, nearly 20 have already eclipsed the much-ballyhooed $100 million in assets under management mark, but just four came from the top three ETF sponsors – iShares, State Street Global Advisors and Vanguard.
Northern Trust, the world's 15th-largest asset management firm, highlights the notion that the ETF arena can accommodate new competitors. The firm left the ETF business in early 2009, but came back in September 2011. At that time, Northern Trust introduced four ETFs, including the FlexShares Morningstar Global Upstream Natural Resources Index ETF (NYSE: GUNR) and the FlexShares Morningstar U.S. Market Factor Tilt Index ETF (NYSE: TILT). Those ETFs have over $528 million and $127 in AUM, respectively.
FlexShares, a unit of Northern Trust, recently rolled out the FlexShares Morningstar Emerging Market Factor Tilt Index ETF (NYSE: TLTE) and the FlexShares Morningstar Developed Markets ex-US Factor Tilt Index ETF (NYSE: TLTD). TLTD and TLTE have raked in over $15 million in AUM combined in less than three weeks of trading.
"The real question is what should our expectations be," said Thomas. "It should be part of our expectations that this is an evolving industry and there are going to be successes and failures."
It can be said Thomas makes a fair, if not excellent point. After all, McDonald's (NYSE: MCD) and Starbuck's (NASDAQ: SBUX) have closed restaurants and coffeehouses. That does not mean they are not successful companies are that consumers do not want burgers or coffee. Likewise, ETF closures do not mean investor interest in these products is waning.
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