The ETF industry has exploded in popularity in recent years. Old mutual fund heavy firms have increasingly leaned into the space, while new shops have proliferated, adding all kinds of new ETFs for investors to consider. That has benefitted investors and advisors immensely. The question is, however — what if there are too many ETFs?
A recent piece of analysis by Factset Vice President and Director of ETF Research and Analytics Elisabeth Kashner explored an important aspect of the ETF landscape that often goes underdiscussed: What happens to the ETFs that don’t see an asset explosion?
The piece, titled Low-Asset ETFs Are Due for a Reckoning, noted that the pace of ETF closures has not met the pace of ETF launches. That has created a glut of funds, especially those with a lower amount of assets.
“U.S. ETFs need a spring cleaning,” Kashner wrote, adding that one third of the 5,072 ETFs available as of March 31 had assets below $50 million and revenues below $1 million.
Read more: The Great Wrapper Migration: Mutual Fund-to-ETF Conversions Cross 200
ETFs, Launches and Closures
What does that mean for investors and advisors? There may be a series of ETF closures on the horizon, especially if headwinds from global volatility grow. At the same time, it also means that not every new launch is worth jumping on from the outset. Indeed, it speaks to the three year milestone that sees some brokers waiting before adding a fund to their offerings.
At the same time, ETF closures may also allow for new growth. Much as forest fires are part of a natural cycle of creation and destruction, should some of those hundreds of small funds close, new potential will have the opportunity to emerge.
“ETF closures are healthy for the industry,” said VettaFi Head of Research Todd Rosenbluth. “There are more than 5,000 products, and asset managers are likely to continue to bring out fresh ideas that are better suited for the market environment to come.”
Whichever the case, the question invites consideration of the future of the ETF industry.
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