Why the ETF deathwatch list is a good thing

Vital Signs Monitor_edited-1Right now, more than 300 exchange-traded funds (ETFs) listed in the U.S. are about to meet their end, according to Invest with an Edge’s Ron Rowland who tracks such things. Those on Rowland’s so-called deathlist include products with unsustainable asset levels, where the cost of managing the fund exceeds the amount of money invested in it. Some might survive—but most will fold.

And while global ETF assets are edging closer to US$3 trillion in asset under management, the industry has reached another milestone according to Rowland—500 ETFs have closed or delisted. That’s a 22.7% mortality rate given the 2,207 that have been listed on U.S. exchanges. Of the 1,712 products currently listed and traded today, the loss of a further 315 from the deathlist could significantly boost that percentage.

But it’s not all bad—some of the expired ETFs are ones that were designed to do so anyway. Last week for example, BMO announced it was scrapping its 2015 Corporate Bond Target Maturity ETF.  But it also ditched its 2020 Corporate Bond Target Maturity ETF and its 2025 Corporate Bond Target Maturity ETF.

The 315 ETFs on Rowland’s list show asset levels for some are as low as US$1 million, some with average daily trading volumes in the mere thousands.

Watching the list, however, can tell us a lot about the ETF industry and where it’s headed. According to Ari Weinberg at Pensions & Investments, the thing that can truly make or break an ETF is distribution—you’ve either got it or you don’t. New players like Fidelity and Charles Schwab have been able to successfully enter the business by keeping costs low and leveraging their retail and adviser customer base, notes Weinberg.

But even the biggest in the business still shutter products—as Rowland points out, iShares closed 18 ETFs last October. And  May 18 was the last day of trading for the five Deutsche X-trackers Target Date ETFs, he notes.

As the ETF industry cleans up shop, Rowland believes it’s a natural step in the evolution of the product, as providers become more focused on their offerings and begin to realize what the key success factors are in the ETF space—distribution is at the top of the list.

In this case, you can think about the whole process as a house cleaning of sorts, with the strongest products rising to the top and the rest slowly heading off into the sunset.