ETF Stats For September 2016: Big Month For Active Management

Forty-one new ETFs and ETNs came to market in September, the largest quantity since the 48 launches of February 2012. Twenty-three died, but only 22 of them were “buried” thanks to Deutsche Bank’s (DB) decision not to liquidate one of its delisted products. The net increase of 18 puts the product count at 1,932 (1,744 ETFs and 188 ETNs).

A dozen actively managed ETFs were introduced and only one closed, pushing the actively managed fund count to 159. This is the second-highest monthly launch count for the actively managed subset and is notable for its diversity of sponsors. JPMorgan, AdvisorShares, Elkhorn, Franklin Liberty, PowerShares, First Trust, ProShares, and TrimTabs introduced new actively managed offerings.

Industry assets grew by 0.7% to $2.41 trillion, mostly the result of $14.8 billion of inflows. Stocks and bonds were relatively flat for the month, so market gains accounted for only $2.8 billion of asset growth. Actively managed ETFs saw inflows of $261 million and now have total assets of $27.5 billion, a nice 19.8% increase since the beginning of the year.

September turned out to be a bad month for Deutsche Bank shareholders and owners of its ETNs. The bank apparently has severe capital constraints, its ongoing viability has been called into question, and the German government is on record stating that it would not extend a lifeline. The fate of individual companies is normally not of concern to us, but when that company is an issuer of exchange-traded notes (“ETNs”), it deserves our attention.

Unlike ETFs and mutual funds that are fully collateralized separate entities and not affected by a sponsor’s bankruptcy, ETNs are unsecured debt obligations of the issuer. Therefore, the failure of an ETN sponsor can reduce the value of its ETNs to rubble. DB voluntarily redeemed eight of its ETNs after the market closed on September 19. Additionally, the NYSE had forced the delisting of another one, the DB Base Metals Long ETN (BDG), on the preceding Friday. However, DB did not redeem/liquidate it. Instead, owners of BDG will have to fend for themselves in the over-the-counter market when trying to get their money back from their BDG investment.

All 20 DB ETNs available to U.S. investors (19 listed and one not listed) are broken products without a functioning creation mechanism, and all carry the heightened credit risk of DB’s current financial state. Additionally, the market exposure provided by many of these ETNs can be replaced with better products from other sponsors. DB’s problems do not need to be your problems. For more information, please refer to Dump Deutsche Bank ETNs Now.

The Global Industry Classification Standards (“GICS”) elevated Real Estate to sector status in September, which caused some industry disruptions during the month. Three ETFs in the Financials sector track indexes that changed due to the transition of equity REITs from Financials to the new Real Estate sector, and a fourth ETF is closing up shop because of this change.

Vanguard Financials ETF (VFH) sold all of its REITs at the August 31 close to coincide with the GICS change. Shareholders of VFH lost the approximately 20% exposure they had to REITs and now have increased exposure to banks and insurance companies. These investors will have to generate specific buy and sell orders if they want their asset allocations to resemble August values.

Shareholders of the Financials Select Sector SPDR (XLF) and Guggenheim S&P 500 Equal Weight Financials (RYF) received special stock dividends consisting of shares of real estate ETFs. Their shareholders did not have to take any action to keep their asset allocations constant. However, the spin-offs caused some anomalies when calculating industry flows for the month.

For XLF, the spin-off created a distribution of $4.44 per share in the form of 0.139 shares of the Real Estate Select Sector SPDR (XLRE). The $2.92 billion leaving XLF was recorded as dividend, which reduced its share price, did not affect share count, and was therefore not considered an outflow. However, the resulting $2.92 billion of assets coming into XLRE required that new shares be created and was counted as inflow. Industrywide asset flows are typically calculated by adding up the net flows from all products. In this case, the spin-offs resulted in no actual change in assets at the industry level. Therefore, the industrywide tally requires a downward adjustment from $17.77 billion to $14.81 billion to offset the $2.92 billion inflow to XLRE that came from another ETF and was not actual industry growth.

A similar situation was caused by Guggenheim’s spin-off from RYF, but it only amounted to around $45 million, putting it in the rounding error of the above discussion. The fourth ETF affected by the GICS change is the Financial Services Select Sector SPDR (XLFS). It was launched a year ago in anticipation of the GICS change scheduled for this year. As such, it was an alternate version of XLF with the equity REITs already stripped out. Today, the holdings and allocations of XLF and XLFS are identical. It would make sense to merge the smaller XLFS into XLF, but State Street has decided on a different course of action. The $140 million XLFS is slated to be closed and liquidated after its last day of trading on November 14.

September 2016 Month End ETFs ETNs Total
Currently Listed U.S. 1,744 188 1,932
Listed as of 12/31/2015 1,644 201 1,845
New Introductions for Month 41 0 41
Delistings/Closures for Month 13 10 23
Net Change for Month +28 -10 +18
New Introductions 6 Months 137 7 144
New Introductions YTD 178 13 191
Delistings/Closures YTD 78 26 104
Net Change YTD +100 -13 +87
Assets Under Management $2,387 B $23.9 B $2,411 B
% Change in Assets for Month +0.8% -1.0% +0.7%
% Change in Assets YTD +13.8% +11.3% +1380%
Qty AUM > $10 Billion 55 0 55
Qty AUM > $1 Billion 272 5 277
Qty AUM > $100 Million 830 37 867
% with AUM > $100 Million 47.6% 19.7% 44.9%
AUM Flows for Month +$15.26 B -$0.45 B +$14.81 B
AUM Flows YTD +$145.36 B +$1.83 B +$162.45 B
Monthly $ Volume $1,648 B $90.1 B $1,738 B
% Change in Monthly $ Volume +25.3% +23.6% +25.2%
Avg Daily $ Volume > $1 Billion 11 1 12
Avg Daily $ Volume > $100 Million 96 5 101
Avg Daily $ Volume > $10 Million 300 11 311
Actively Managed ETF Count (w/ change) 159 +11 mth +22 ytd
Actively Managed AUM $27.5 B +1.6% mth +19.8% ytd

Data sources: Daily prices and volume of individual ETPs from Norgate Premium Data. Fund counts and all other information compiled by Invest With An Edge.

New products launched in September (sorted by launch date):

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

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