PowerShares ETF Shutdown: Anything But a Sign of the Times

by on May 11, 2009 | Updated June 18, 2009

In the exciting world of ETFs, every day seems to bring an announcement of a new fund launch. So PowerShares’ announcement earlier this month that it will shut down nearly 15% of its ETFs may have come as a shock to many investors. But don’t be alarmed. ETFs are still gaining rapidly in popularity, with some experts suggesting the industry will top the $1 trillion in assets mark before the end of the year. The ETF industry right now is in a “10 steps forward, 1 step back” mode, and the closure of these funds is nothing more than a small speed bump on an otherwise promising path.

Although PowerShares is closing 19 of its 135 ETFs, these figures are misleading. The funds to be shuttered account for less than 1% of total assets held in PowerShares ETFs. Since these funds have had difficulty in attracting investors, they have been unable to establish a sufficient level of liquidity and are unable to turn a profit given the low fees associated with ETFs.

But this doesn’t mean that demand for ETFs in general is waning – just that there wasn’t sufficient demand for these particular ETFs. In the current rapid-growth environment, fund closures should be expected and taken in stride. The reason: sponsors are willing to try just about any fund idea in an effort to gain market share. Afraid to miss out on the “next big thing,” sponsors have green-lighted most fund ideas. What we’re seeing now is simply a market correction – there isn’t demand for some of these recently launched funds, so PowerShares has decided to close down.

It’s important to note that the closing of a fund won’t cause significant losses for investors. The closing funds will simply liquidate their underlying assets, and distribute the proceeds to investors. And it certainly isn’t a sign of trouble at PowerShares, which will still operate more than 100 popular ETFs following the liquidation of these 19.