The month of May brought the largest monthly decline ever in the number of US-listed ETFs and ETNs. Active listings changed by -14 after averaging more than +17 new products per month during the past three calendar years. Additionally, the six-month moving average of net new listings turned negative for the first time in history.

There were five new ETFs introduced during the month and 19 closures. The total number of listed products at the end of May stands at 830 (745 ETFs and 85 ETNs), the lowest level since last October. The quantity is down 15 from the start of the year and down 29 from the peak level of 859 established in early February prior to the closure of the Northern Trust NETS family of ETFs.

In the exciting world of ETFs, every day seems to bring an announcement of a new fund launch. So PowerShares' announcement earlier this month that it will shut down nearly 15% of its ETFs may have come as a shock to many investors.

But don't be alarmed. ETFs are still gaining rapidly in popularity, with some experts suggesting the industry will top the $1 trillion in assets mark before the end of the year. The ETF industry right now is in a "10 steps forward, 1 step back" mode, and the closure of these funds is nothing more than a small speed bump on an otherwise promising path.

On May 1, 2009, Invesco (IVZ) PowerShares Capital Management LLC announced that it would be closing 19 ETFs on May 18. Shareholders of record on May 18 will receive cash equal to the amount of the net asset value of their shares as of May 22. That cash value should include any capital gains and dividends left in the cash portion of investors’ brokerage accounts, according to PowerShares. While the shuttering of these 19 ETFs may not come as a surprise to some investors, especially in light of earlier ETF closings in 2008, they nonetheless change the landscape of the ETF world. Liquidity is an excellent indicator of viability in the ETF industry, but there is not a particular formula that dictates if, or how long, a fund will last if investor interest is lacking or waning. The closing of the 19 PowerShares funds this month provides an opportunity to sort through some of the ETF clutter and examine what can go wrong and why.

The incredible popularity of ETFs from 2007 to mid-2008 brought with it an onslaught of new, and often similarly themed, products to market. The unique way in which ETFs are launched has provided sponsors such as PowerShares and Claymore with the opportunity to launch multiple products at a time. This flood, however, has proved to be unsustainable, leading to multiple ETF closings across the industry. Despite the recent hit, PowerShares still remains a significant player in the ETF business, with a product line of 135 ETFs with assets of $25.8 billion as of March 31.

Invesco PowerShares announced on Friday that it plans to close 19 of its ETFs. The affected funds represent less than 1% of Invesco PowerShares’ total assets.

This type of action isn’t new to the ETF world as Claymore closed 11 ETFs last year representing less than 4% of their collective assets. Every ETF that comes to market, although well thought out, doesn’t always get traction. At one point the economics of keeping smaller funds open no longer makes sense.

Invesco PowerShares Friday (5/1/09) announced plans to close and liquidate 19 ETFs. The last day of trading for the affected products (listed below) will be May 18, with liquidation and distribution amounts determined by the May 22 value.

The FAQ (.pdf) has some additional information about the closing. PowerShares warns that starting in early May, the closure process “will cause each fund’s holdings to deviate from the securities included in its underlying index and each fund to increase its cash holdings, which may lead to increased tracking error.” Therefore, I advise all shareholders to sell their holdings as soon as possible, and use a limit order when doing so.

The number of ETFs on Deathwatch continues to grow as we enter 2009. My current list contains 139 names: 97 ETFs and 42 ETNs. The list includes any ETF/ETN that is at least six months old and had an Average Daily Value Traded of less than $100,000 in December.

Exchange Trade Notes are suffering from concerns of default risk. The Lehman Brothers (LEHMQ.PK) bankruptcy, which resulted in the demise of three ETNs, is causing investors to hesitate before throwing money into these products. Unless ETN sponsors to take steps to calm investor fears, their representation on the list is likely to grow in the coming months.

The news for Black Friday is that sales rose. Reports range from 3% to 7%, but is that really more? The consensus is that retailers heavily discounted prices.

Sales may have risen over the same time last year, but it’s difficult to imagine that profits rose in the process.

Is there anything an exchange traded fund investor can do in a down market such as this besides grin and bear it?

Investment strategies such as stock picking and bond investing are all in the red, so why not a fundamentally weighted indexed ETF?

By Matthew Hougan

News that PowerShares (IVZ) is lowering fees on the FTSE RAFI exchange-traded funds says good things about the ETF market.

PowerShares (IVZ) announced late Friday that it plans to slash expense ratios on its 11 exchange-traded funds that use Research Affiliates' fundamental indexing approach.

The ETFs now have expense ratios capped at 0.60%, according to a PowerShares spokesperson. Those fees will be reduced to a uniform 0.39% on Nov. 1.

An overwhelming 78-12 vote by the Senate sends a massive $634B spending bill to President Bush, who is expected to sign the measure before the government's fiscal year-end comes to a close on Tuesday.

The bill contains provisions for $25B in subsidized loans for automakers in addition to removing a ban on offshore drilling on the Atlantic and Pacific coasts. Participating companies from the auto industry would not have to begin repayment of the loans for five years and the proceeds are meant to be used in the development of more fuel efficient vehicles through new technologies and revamped manufacturing plants.

An article in this weekend's Wall Street Journal about ETFs with dwindling market caps caught our attention.  More and more ETFs seem to be trading hardly any volume these days, and many have already liquidated or announced plans to liquidate in the future.  As Wall Street usually does with everything, it seems to have gone overboard with ETFs, creating too many too fast.  Eventually only the biggest and strongest will survive.

We looked at more than 700 US ETFs and ETNs to see which ones are struggling the most with low market caps and volume.  The average market cap of all ETFs we looked at was about $816 million, but 131 (about 18%) have market caps lower than $10 million.  The market cap of the largest ETF, SPY, is also greater than the sum of the market caps of the smallest 596 (84%) ETFs.  Talk about income inequality!  The article notes that anything less than $50 million "probably loses money for the firm that sponsors it." 

By Murray Coleman

With 136 exchange-traded funds still on the market with less than $10 million in assets, the closing of five unpopular bond exchange-traded funds by Ameristock this week isn't likely to be the last, say industry observers.

Joseph Nocera reviews the bidding in the NYT - Passions Run High on Indexing:

IndexUniverse has an article up that recaps 2007. It notes that fundamental indexing like the RAFI ETF (PRF) and some of the WisdomTree funds lagged the cap weighted funds. This was more of a domestic (rather than foreign) phenomenon.

The article even quotes Bruce Lavine from WisdomTree offering some explanation. The article attributes the following quote to Lavine: "There are some unique characteristics about the U.S. market that have just been tough this year. That had to do with getting let down by companies that had solid fundamentals on paper."

Global Retail and Consumer Goods & Services ETFs
iShares S&P Global Consumer Discretionary Sector Index Fund (RXI)

PowerShares Fundamental Sector ETFs
PowerShares FTSE RAFI Basic Materials Sector Portfolio (PRFM)
PowerShares FTSE RAFI Consumer Goods Sector Portfolio (PRFG)
PowerShares FTSE RAFI Consumer Services Sector Portfolio (PRFS)
PowerShares FTSE RAFI Energy Sector Portfolio (PRFE)
PowerShares FTSE RAFI Financials Sector Portfolio (PRFF)
PowerShares FTSE RAFI Health Care Sector Portfolio (PRFH)
PowerShares FTSE RAFI Industrials Sector Portfolio (PRFN)
PowerShares FTSE RAFI Telecom & Technology Sector Portfolio (PRFQ)
PowerShares FTSE RAFI Utilities Sector Portfolio (PRFU)

What Are They?

Roger Nusbaum submits: The gang over at PowerShares rolled out a bunch of sector ETFs based on Robert Arnott's method of fundamental weighting. I am sure some people will immediately say we have enough sector ETFs, and maybe we do, but from where I sit if only one or two of them provide a better way to access a sector, and the rest turn out to be duds, that is OK.

Quite a few of the PowerShares product line does well, performance-wise, and draws a lot of volume. Their success allows them to venture further out and try new ideas. I saw Robert Arnott speak at the NYSE last December, and I asked about this methodology being applied to foreign countries. He said yes, and also various sectors, which we are seeing today.