$4 Trillion ETF Market Faces Major Overhaul in 2019 Amid Rising Fund Closures
The $4 trillion ETF industry is undergoing a significant transformation as increased competition and market saturation lead to a surge in fund closures, especially among smaller players lacking scale advantages.
Over the past 25 years, the exchange-traded fund (ETF) industry has experienced explosive growth, reaching a staggering $4 trillion in assets. However, as of 2019, the sector is witnessing a critical shakeout phase, where numerous smaller funds unable to achieve economies of scale are shutting down. By early October 2019, at least 90 ETF closures had been recorded, following a record 139 fund closures in 2018. Meanwhile, the launch of new ETFs and exchange-traded notes (ETNs) peaked in 2011, signaling a maturing marketplace, according to FactSet Research Systems data highlighted in The Wall Street Journal.
Michael Sapir, CEO of ProShares, an ETF issuer, told The Wall Street Journal, "With more participants entering the industry, expanding market share becomes increasingly challenging. Unfortunately, many funds become 'roadkill' in this competitive environment." A report from ETF.com echoes this sentiment, describing the ETF market as stable and mature, having passed its most rapid growth phase but still offering substantial opportunities ahead.
Key Insights
- Fund closures are increasing as many ETFs fail to reach profitability thresholds.
- Leading ETF providers are consolidating their market dominance.
- The rise of low-cost passive investing benefits the largest ETF issuers.
Implications for Investors
The annual number of new ETF launches peaked at over 300 in 2011, dipped below 200 between 2012 and 2014, and then rebounded to over 250 annually from 2015 through 2018. In 2019, launches are nearing 200, while closures have steadily climbed since 2011.
Market concentration is intensifying. Although total ETF assets grew by 90% over five years ending August 2019, just 4.8% of funds (100 out of 2,100) captured 83% of that growth, per CFRA Research. Notably, over two-thirds of these top funds are managed by industry giants BlackRock Inc. and The Vanguard Group.
The three largest ETF brands—BlackRock's iShares ($1.604 trillion AUM), Vanguard ($1.064 trillion), and State Street's SPDRs ($665 billion)—collectively manage $3.333 trillion, according to FactSet data as of October 22, 2019, reported by ETF.com.
Profitability benchmarks suggest ETFs typically need assets under management (AUM) between $50 million and $100 million within three to five years to sustain operations, says Elisabeth Kashner, FactSet's ETF research director. Funds failing to reach $50 million in their first year face high closure risks.
Among ETFs launched from 2007 to 2016 that had less than $50 million AUM after one year, 44% closed, and an additional 30% never exceeded that threshold. For 2018 launches, over 80% ended the year below $50 million.
Although the U.S. mutual fund market remains larger, with approximately 8,000 funds and $15.4 trillion in assets, about 25% of those assets are passively managed. Morningstar reports ETFs are steadily gaining market share, adding roughly $135 billion in assets in 2019, while mutual funds have seen outflows totaling about $200 billion.
Future Outlook
With more than half of the roughly 2,100 U.S.-listed exchange-traded products holding less than $100 million in AUM, industry consolidation and fund closures are expected to accelerate, notes UBS ETF strategist David Perlman. Additionally, as investors increasingly prefer low-cost, passively managed ETFs over active funds, the largest providers with economies of scale are poised to strengthen their market dominance further.
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