Amid fee pressure and fierce competition, 2019 has been the toughest year yet for ETF issuers
On the whole, it’s hard to picture anything but continued success for the exchange-traded fund industry. Following headlines of surging ETF sales, surveys showing investors’ plans to increase portfolio allocations to ETFs, and a US$6-trillion AUM milestone surpassed, forecasts of explosive growth over the coming decade should raise few eyebrows.
But behind the bullish outlook for ETF assets is a bearish situation in fund issuance, at least in the US$4.4-trillion market for US ETFs. As reported by Bloomberg: “Asset managers set up fewer ETFs in 2019 than in any other year since 2014.”
Approximately 225 funds traded for the first time in the past 12 months, marking the second straight year of decline, while fund closures spiked 35%. With management fees on a persistent downward trend, issuers are being force to consider uncharted territory as assets are gravitating more toward the largest and most well-established funds.
“It’s ‘The Hunger Games’ out there,” Ed Lopez, head of ETF product at Van Eck Associates, told Bloomberg. “There’s just a ton of ETFs … it’s harder and harder to be successful and to sustain an ETF through the early parts of its cycle.”
Before last year, the mania surrounding ETFs was sufficient to support the new products churned out by asset managers. But now, investors have ETF exposure to real estate, gold, convertible debt, and Chinese equities — just to name a few. That’s why many of the funds launched last year focused on hot or niche industries such as gaming, cyber security, and marijuana; ESG also saw greater attention, leading to a 150% boost in ESG ETF assets.
Still, survival has become more challenging than ever. Bloomberg reported that over 100 funds in the U.S. were shuttered last year, spanning both single-country strategies and others with broader international exposure. More casualties are expected in 2020: Invesco is reportedly planning to close 16% of its U.S. ETFs, including 14 of 20 strategies it had acquired from its purchase of Oppenheimer Funds.
Keeping fledgling funds alive is also a tough proposition as the lower-fee movement forces issuers to do more with less. While the zero-fee fund movement isn’t necessarily an industry-wide trend, it has contributed to compression and pressure that’s particularly acute among issuers of commoditized and passive strategies.
As the prospects for new launches grow ever bleaker, many issuers have set their sights on gathering assets in existing products, said ETFGI founder Deborah Fuhr. “It’s about economies of scale, growing distribution and rationalizing,” she told Bloomberg.
However, the first half of 2020 could still see more equity ETFs being introduced to U.S.-based investors. CFRA Director of ETF Research Todd Rosenbluth pointed to the ETF rule taking effect this month, which “should make it easier and cheaper” to create ETFs, as well as a new non-transparent ETF structure that several active managers are poised to deploy this year.
