Which ETFs Are More At Risk To Closures?

by: Tom Lydon

Many exchange traded fund observers point to low assets under management as a predominant indicator for the future success of an ETF, but there are other factors that affect a fund's survivability.

"The biggest driver of fund closure in conjunction with low assets was actually the overall strength of the issuer; in other words, the less assets the provider had overall, the more likely it was to close a product (or even an entire line of products)," Credit Suisse analyst Victor Lin said in a research note.

In contrast, larger providers have deeper pockets to keep products opened without a significant negative impact.

Moreover, there is a type of trial period that most fund providers monitor.

"75% of the ETPs that have closed have done so within 2 years," Lin added. "The patience of a provider to wait for a product to be widely adopted has also diminished over time."

Currently, international equity ETFs are more at risk, compared to domestically focused stock ETFs. Commodity ETFs are the most at risk, followed by leveraged/inverse fund products. Fixed-income products appear more stable than other categories.

Exchange traded notes, on the other hand, are subject to the credit risk of the issuing bank. So far, only four ETNs out of about 250 in the U.S. have been closed due to defaults. While the risk is minimal, potential investors should still know that ETNs are not ETFs and come with different risks.

Max Chen contributed to this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.