there are signs the supply of exchange-traded funds (ETFs) has
finally outrun demand, as some of the market’s leading players exit
the market and fund closures accelerate.
management business iShares to European private equity firm CVC
Capital Partners Group for $4 billion, marking a significant
departure for the world’s largest ETF player.
A month earlier, Northern Trust, the
Chicago-based custody business, shuttered 17 of its exchange-traded
funds, which had $33.3 billion of assets under management at
year-end.
ETF Deathwatch, an online listing of closed
ETFs and exchange-traded notes, or ETNs, listed 171 closed funds in
February, an increase of nearly 12 percent from a month ago and
another new record, according to Ron Rowland, founder of Invest
With An Edge, an investor website, which runs the listing.
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The current list consists of 134 ETFs and 37
ETNs that are at least six months old and failed to have an Average
Daily Value Traded (ADVT) of at least $100,000 during the month of
February.
The industry was 10 years old before it had
its first casualty in 2003. A total of four funds closed that year,
a group of bond-based products known as FITRs.
Three years passed before the next ETF fell by
the wayside with the departure of the SPDR O-Strip in 2006, a
product which tracked the S&P500 Index-. At the end of 2007,
the US industry had seen a grand total of only five of the products
meet their demise.
All that changed in 2008 with the delisting of
58 ETFs and ETNs. The industry’s lifetime toll surged from 5 to
63.
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By GlobalData“A casual observer might blame this on the
financial crisis that engulfed the market during the last quarter
of the year, but in fact more than 80 percent of the closures were
announced before the end of September,” Rowland said.
“The market crisis didn’t cause the ETF death
toll to surge this year; it was more a simple case of supply and
demand.”
A record number of new ETFs, more than 290,
came to market in 2007. An industry of less than 200 products in
2004 exceeded the 800 mark in early 2008. A four-fold increase in
the number of ETFs in just three years was too much, too fast.
There were simply more products than the market could absorb.
Even with the closures, the ETF industry had a
strong 2008.
At the end of the year, 13.8 billion shares
were outstanding across the industry, up 52 percent from 12 months
earlier, according to SSgA Strategy & Research and Bloomberg.
Because of investment performance, assets fell 12 percent during
the year.
Downward spiral
As the market began its downward spiral this
year, investors ditched mutual funds for ETFs. Part of this is due
to ETFs’ tax efficiency and trading capability and their enhanced
transparency – a current buzzword in financial services.
ETFs’ ability to offer investors exposure to a
sector of the stock market without the risks of single stocks have
attracted wary investors seeking the safety of built-in
diversification.
Still, investors have been slower in 2009 to
rush to ETFs than they were in 2008. In the fourth quarter of 2008,
mutual funds shed $114.3 billion, while ETFs took in $62.6
billion.
In 2009, however, through March 6, $23.5
billion fled ETFs and $50 billion left mutual funds.
BGI had the largest share of the ETF market at
the end of 2008, with 48.3 percent share, according to SSgA. Part
of San Francisco-based Barclays Global Investors, iShares has 620
employees across 14 countries.
The sale is a tough move for Barclays, as the
bank is keenly aware that as the market downturn continues, ETFs
will continue to provide a safe harbour for worried investors.
The key product strengths of ETFs – liquidity,
cost efficiency, transparency and their multiple brokers model,
which protects investors from the risk deriving from being tied to
a single issuer as in the case of a certificate – doubtless will
continue to draw significant interest.
For long-term investors, especially those in a
high tax bracket, owning ETFs that have stored up tax losses will
be a big plus down the road over owning mutual funds that don’t
have tax losses to offset capital gains.
