ETF Deathwatch For July 2016: Closing In On 500 Names

The quantity of funds on ETF Deathwatch climbed by 18 for July with the addition of 24 new names and the removal of six. Only three of those leaving did so by improving their health. The other three left in a casket. The new count is 490 (380 ETFs and 110 ETNs), and it will likely surpass 500 next month if the current pace continues.

Based on the 1,931 listings at the end of June, the 490 funds on ETF Deathwatch suggests that 25.4% of the funds more than six months old are both illiquid and vulnerable to closure. Another 124 (6.4%) are excluded from this calculation because they were launched in the past six months and are given a grace period.

Two weeks ago, the industry crossed a milestone with the 600th ETF closure. The lifetime mortality rate for U.S. ETFs and ETNs now stands at 23.6%. Given that 25.4% of the still-living products are on ETF Deathwatch, and another 6.4% may potentially join the list when they achieve six months of age, suggests that more than half of all the products launched so far may not survive. It behooves you to pay attention and not buy just any ETF with a catchy name, ticker symbol, or fancy marketing campaign.

The average asset level of products on ETF Deathwatch increased from $7.0 million to $7.2 million, and the quantity of products with less than $2 million in assets grew from 92 to 96. The average age increased from 47.2 to 47.7 months, and the number of products more than five years of age jumped from 187 to 197. Nearly 200 products have been losing money for their sponsors for more than five years. The reasons are not clear, but here are some possibilities:

  • The fund is part of a strategic lineup.
  • The sponsor is convinced it’s “just a matter of time” before assets increase.
  • The sponsor is in denial and/or believes closing would be an admission of failure.
  • The board is unaware of the situation.

At least one ETF sponsor has told me it has never closed an ETF and it intends to never close one. This appears to be some sort of false pride, as this sponsor believes it would be an admission of failure instead of embracing the benefits of closing an unprofitable ETF.

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Disclosure: Author has no positions in any of the securities, companies, or ...

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