ETF Survival Rates By Asset Class

|
Includes: BSCI
by: Ron Rowland

Not all ETFs and ETNs survive. The days of 100% ETF survival rates are long gone and lasted only until the first closure occurred. Since then, survival has been on a downward trend, recently falling below the 74% level. Equities have historically been the driving force of the ETF industry, claiming the largest quantities of both product launches and assets under management. It should, therefore, come as no surprise that equity ETFs also constitute the largest number of closures. The phenomenal growth rates and innovation of the ETF industry have resulted in many additional asset classes becoming readily available to investors. Today, we will examine ETF survival rates by asset class.

Although it may seem like another equity ETF or two is closing every week, the equity ETF survival rate of 74.0% is actually above the industry-wide average of 73.8%. Even though the asset class has undergone 506 closures, it still has 1,442 ETFs listed for trading. Equity ETFs are likely to remain the industry's bread and butter for years to come.

Debt (bonds and fixed-income) ETFs currently have the highest survival rate of any asset class at 78.7%. They are a much smaller group than the equity ETFs, having only about 18% as many launches, but even that small fraction is still enough to make Debt the second-largest asset class among U.S. ETFs.

To be fair, I excluded Defined-Maturity Debt ETFs from the Debt group and placed them in their own asset class. These funds, such as the Guggenheim BulletShares 2018 Corporate Bond ETF (NYSE:BSCI), essentially announce their closure date on the day they launch. These products are designed to act more like an individual bond with an explicit maturity and liquidation date. Guggenheim launched BSCI on March 28, 2012, stating it would hold bonds maturing in the year 2018, and that it would liquidate and return the money to shareholders at the end of 2018. So far, 19 such ETFs have matured and closed gracefully - not one has met with premature death. Even so, their survival rate currently stands at a respectable 68.3%, although all 41 of the existing products are scheduled to close within the next decade.

Commodities are an asset class that many investors did not have easy access to before ETFs came along. Despite what seems to be an outsized number of leveraged crude oil ETFs and ETNs meeting their demise, the commodity ETF survival rate is above average at 76.4%. Today, commodities are the third-largest asset class as measured by ETF quantity.

How can the three major (and largest) asset classes of stocks, bonds, and commodities all be "above average" when it comes to survivability? The answer is that the "other" asset classes have such a low survival rate that they bring the average down. These others include currencies, volatility (VIX) futures, mixtures (asset-allocation funds), and miscellaneous.

Currencies in an ETF format seemed like a good idea when they first came out, but these ETFs haven't caught on with investors, and they need more leverage to be of interest to currency traders. Just 33 currency ETFs remain from the 53 that were launched, for a survival rate of 62.3%.

Volatility ETFs holding VIX futures contracts are a unique asset class. Unlike commodities, which are also traded with futures contracts, volatility is not tangible - you cannot take delivery of volatility. VIX ETFs are intended for active traders, and of the 36 VIX ETFs launched, just 19 remain, producing a survival rate of 52.8%.

The survival rate for ETFs with a mixture of assets is surprisingly low at 64.9%. Asset allocation strategies, those holding a mixture of stocks, bonds, and commodities, would seem to be a natural fit for the ETF format. However, for reasons that remain head-scratchers, both iShares and Deutsche X-trackers abandoned their lineups of "target-date" ETFs. Not to be confused with the defined-maturity ETFs described above, target-date funds attempt to provide a portfolio with an asset mixture that becomes more conservative each year. For example, a 2040 target-date fund is intended for people who plan to retire in the year 2040. Today, that fund would be mostly stocks, but would gradually shift toward bonds each year. These funds would not mature and liquidate in 2040, but they could potentially be merged into an "in-target" fund at some point. For now, these target-date strategies are available in mutual funds but not in ETFs.

You are probably wondering about the two ETFs unable to fit into any of the previously defined asset classes and which had to be categorized as Miscellaneous. These are the infamous MacroShares Major Metro Housing Up (former ticker UMM) and Down (former ticker DMM) ETFs. These ETFs did not invest in anything, and did not attempt to track anything with daily pricing. MacroShares marketed them as tracking the Case-Shiller Major Metro Housing Price Index, but the teeter-totter design and implementation were seriously flawed. While it can be argued that housing is indeed an asset class, it is not a liquid one. These ETFs did not have any underlying equity, debt, commodity, or other instruments to invest in. The survival rate of ETFs with an undefined "miscellaneous" asset class is 0%.

Keep in mind, the ETF survival rates presented here represent what has happened as of April 30, 2017. It is based on the 710 closures that have occurred to date. The next 710 closures might tip the scales in another direction. As always, the future remains unknown, but the ETF Deathwatch might help you avoid being caught owning an ETF that fails to survive.

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.