ETF Shakeup: HOLDRS Headed For Extinction, ELEMENTS To Follow?

by on August 24, 2011 | ETFs Mentioned:

The competitive landscape of the ETF industry has evolved rapidly over the last several years, with several new players–both big and small–making a push into the space. From financial giants such as RBS and Citi to relative unknowns such as Javelin and Precidian, the roster of active ETF issuers has grown to nearly four dozen. Now, mirroring a trend playing out in the lineup of exchange-traded products, it appears that some contraction is in order. Coming months could see a few ETP issuers wiped off the map, as a series of fund closures and mergers should reduce the number of companies that market exchange-traded products [see also ETF Update: Pipeline Continues To Fill].

HOLDRS Winding Down

Earlier this month, Van Eck and Merrill Lynch announced a unique arrangement that would convert six of the most popular HOLDRS products into more traditional Market Vectors ETFs. While HOLRDS are often grouped under the ETF umbrella, the structure features many nuances that result in unique voting rights, expenses, and portfolio concentrations. If the conversion is completed, six HOLDRS would become part of the Van Eck suite of ETFs:

Ticker New Market Vectors ETF New Underlying Index
OIH Oil Services ETF Market Vectors US Listed Oil Services 25 Index
SMH Semiconductor ETF Market Vectors US Listed Semiconductor 25 Index
PPH Pharmaceutical ETF Market Vectors US Listed Pharmaceutical 25 Index
BBH Biotech ETF Market Vectors US Listed Biotech 25 Index
RTH Retail ETF Market Vectors US Listed Retail 25 Index
RKH Money-Center Bank ETF Market Vectors US Listed Money-Centre Bank 25 Index

It now appears increasingly likely that the remaining 11 HOLDRS not covered by the agreement with Van Eck will be shuttered at some point in the not-so-distant future. In SEC filings made in mid-August, Merrill Lynch indicated it is likely that the products not scheduled for conversion to Van Eck ETFs will be terminated and liquidated during the fourth quarter of 2011. That would shrink the ETF lineup by 11 products that currently have aggregate assets of about $440 million (about 0.04% of total industry assets). The HOLDRS that could not make it to 2012 include:

  • Telecom (TTH)
  • Internet (HHH)
  • Software (SWH)
  • Utilities (UTH)
  • Internet Architecture (IAH)
  • Broadband (BDH)
  • Wireless (WMH)
  • Market 2000 (MKH)
  • B2B Internet (BHH)
  • Internet Infrastructure (IIH)
  • Europe (EKH)

ELEMENTS Winding Down Too?

Deutsche Bank announced earlier this week that it will redeem three ETNs offered under the ELEMENTS platform, including the Benjamin Graham Total Market Value Index-Total Return ETN (BVT), Benjamin Graham Large Cap Value Index-Total Return ETN (BVL), and the Benjamin Graham Small Cap Value Index-Total Return ETN (BSC). Holders of those ETNs as of August 23 will receive a cash payment equal to the amount of the daily repurchase value that is expected to be paid on August 26. Each of the three ETNs that will be shuttered recently passed their three year anniversary [see also Introducing The New & Improved].

The three ETNs are among the smallest products in the ETP universe; each has less than $5 million in assets. There are 11 other ETNs on the ELEMENTS platform, including two more issued by Deutsche Bank (DOD and WMW have a little more than $10 million in aggregate assets). Other ELEMENTS ETNs are issued by Swedish Export Credit Corp. (SEK), HSBC, and Credit Suisse, and a few have been successful in gathering assets. The most popular, RJI, has AUM of nearly $700 million. No other ELEMENTS ETN has accumulated more than $100 million [see all the ELEMENTS ETNs here].

Deutsche Bank, which also partners with PowerShares on a suite of ETFs and ETNs, has made efforts to expand its own lineup of exchange-traded funds in recent months. The company now offers a suite of currency hedged international equity ETFs that are exchange rate-neutral alternatives to funds such as EEM and EWC.

Wave Of Closures?

Analysts have been expecting that a wave of contraction in the ETF industry in 2011 would eliminate many of the smaller products. At the end of July, there were more than 160 ETPs with assets of less than $5 million. More than 450 ETPs had less than $25 million in AUM at the end of last month. But fund closures in 2011 have been few and far between. A few ETNs have hit automatic redemption levels and FaithShares terminated its lineup of faith-based ETFs, but there has been little in the way of contraction otherwise [see also FaithShares To Close Doors On Four ETFs].

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Disclosure: Photo courtesy of Daniel Schwen. No positions at time of writing.