Many things require regular pruning to remain healthy, and the U.S. ETF industry is no exception. Today (March 22, 2017) is the last day of trading for seven WisdomTree (NASDAQ:WETF) ETFs. Their impending delisting and liquidation pushes the tally to 700 ETF closures. Much like the 500-closure and 600-closure milestones, this one was both needed and expected. Additional such milestones are inevitable, and we will probably see a day when the number of closures becomes larger than the quantity of ETFs that are still listed for trading.
The ETF pie is large and growing. Not surprisingly, numerous asset managers want to get a piece of that pie. The barriers to entry remain quite low for the ETF industry - any firm with an idea and a little financial backing can bring a new ETF market. The recent SEC rejection of the Winklevoss Bitcoin ETF might prompt me to qualify "an idea" by changing it to "an idea involving regulated securities." However, the fact remains that it is relatively easy to enter the ETF market, which is one of the reasons there is a proliferation of new offerings.
While the barriers to entry remain small, the barriers to success increase every year. Long gone are the halcyon years of "if you build it, they will come" for individual ETF assets. The industry is seeing tremendous growth, with assets doubling to more than $2.7 trillion in just a little more than four years. However, most of that growth is going to the large and established players. Additionally, these large players are exploiting their size by pushing fees lower, which helps them attract even more assets and creates another competitive advantage. Lower fees means it requires even more assets for a new ETF or sponsor to be profitable, increasing the barriers to success even further.
Some analysts believe it takes $100 million in assets for the typical ETF to be profitable for its sponsor. If true, then more than half (~54%) of all ETFs on the market today are not making money for their sponsors. Others put the break-even point lower. If it takes $50 million in assets to be profitable, then the number of products above this threshold improves to 1,092, making about 55% of them profitable. This, of course, translates to 45% being unprofitable, which is a very large percentage.
In terms of raw numbers, sponsors have launched 2,688 ETFs and ETNs in the United States. Today's closures push the lifetime death toll to 703, leaving just 1,985 listed for trading when the markets open for trading tomorrow. This puts the ETF mortality rate at 26.1% - its highest level ever. As mentioned earlier, the number of closures will likely surpass the quantity still listed eventually, which will equate to a mortality rate in excess of 50%.
Yes, pruning is healthy, and the ETF industry has been ridding itself of deadwood on a regular basis. However, more thinning is still needed. With somewhere between 45% and 55% of existing products currently not turning a profit for their sponsors, it seems obvious that more closures will be forthcoming.
Disclosure: Author has no positions in any of the securities mentioned and no positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) is received from, or on behalf of, any of the companies or ETF sponsors mentioned.