PowerShares, the Wheaton, Illinois-based ETF issuer known for its QQQ fund and line of products linked to “intelligent” benchmarks, announced late last week that it will shut down several ETFs before the end of the year. December 14 will be the last day of trading for ten PowerShares ETFs:
- PowerShares Dynamic Healthcare Services Portfolio (PTJ)
- PowerShares Dynamic Telecommunications & Wireless Portfolio (PTE)
- PowerShares FTSE NASDAQ Small Cap Portfolio (PQSC)
- PowerShares FTSE RAFI Europe Portfolio (PEF)
- PowerShares FTSE RAFI Japan Portfolio (PJO)
- PowerShares Global Biotech Portfolio (PBTQ)
- PowerShares Global Progressive Transportation Portfolio (PTRP)
- PowerShares NASDAQ-100 BuyWrite Portfolio (PQBW)
- PowerShares NXQ Portfolio (PNXQ)
- PowerShares Zacks Small Cap Portfolio (PZJ)
“We regularly review portfolios carefully evaluating numerous factors such as investment results, length of time in the market, investor interest, and the potential for future growth,” said Ben Fulton, Invesco PowerShares managing director of global ETFs, in a press release. “Based on this assessment, we believe that it’s in the best interest of our investors that we refocus our resources on areas that we believe are of greater client interest.”
While the closure of ten funds represents a material portion of the PowerShares lineup–the company currently offers close to 150 ETFs–the impact on assets will be minimal. At the end of the third quarter, the ten ETFs to be closed had aggregate assets of about $90 million, or only about 0.2% of total PowerShares ETF assets. All of the ETFs to be shuttered have been trading for at least two years, meaning that they have had sufficient time to accumulate assets but for whatever reason have been slow to gain traction with investors. In addition to several hyper-targeted sector funds, the list of ETFs to be closed includes two RAFI funds focusing on equity markets in Japan and Europe. PowerShares will continue to offer a number of ETFs linked to RAFI indexes tracking domestic stock and bond markets [see Does Your Portfolio Need A RAFI ETF?].
Wave Of Closures
The announcement from PowerShares adds momentum to a wave of contraction that has been sweeping over the ETF industry in recent months. In August, Claymore (now Guggenheim) and Grail announced that they were closing several of their smaller ETFs, and September saw both Geary Advisors and GlobalShares pull out of the industry altogether (Geary closed its two funds while GlobalShares shut down the five funds in its lineup). Also in September, Javelin announced that it would pull the plug on its Shari’ah -compliant ETF (JVS). Including the ten PowerShares funds scheduled to be liquidated in December, a total of 46 ETFs have closed down so far in 2010, a considerable jump from last year [see all Closed ETFs]. Still, a flurry of new product launches has pushed the number of U.S.-listed ETFs towards 1,100; the month of September alone saw more than two dozen new ETFs begin trading [see September ETF Roundup: Launches, Filings, and Closures].
Most of the ETFs to close down this year have maintained total assets of less than $20 million, although the GlobalShares FTSE Emerging Markets Fund (GSR) finished September north of $70 million. ETFs must reach an asset threshold in order for the expenses generated make the operations profitable for the issuer. While the exact number obviously varies depending on firm overhead, expense ratio, and the nature of exposure offered, the breakeven mark is generally believed to be somewhere between $25 and $50 million. At the end of the third quarter, nearly 500 ETFs had assets of $50 million or less; more than 360 of those held less than $25 million. While many ETFs that fall into that group are relatively new funds still building asset bases, there are a number of more mature products that have failed to attract investor assets.
The closing of an ETF doesn’t mean that investors lose their assets in the fund. After the security ceases trading, remaining investors receive a cash distribution equal to the net asset value of their shares. Still, investors can potentially incur costs when a fund shuts down, and the distributions may have unwanted tax ramifications [see How To Survive An ETF Liquidation].
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Disclosure: No positions at time of writing.