The $10.4 trillion US exchange-traded fund industry’s blockbuster year comes with an asterisk: even amid record inflows and launches, funds are shuttering at a nearly unprecedented clip.
Following last year’s all-time worst tally, almost 200 ETFs have shut down so far in 2024 — nearly matching the pace of early pandemic terminations. At the same time, more than 700 new funds have started trading this year, the second-consecutive year of record launches.
The numbers illustrate that as the ETF arena’s product pipeline speeds up, more funds are getting left behind. With investors funneling trillions of dollars toward the tax efficient and relative low costs of the ETF wrapper, veteran issuers and high-profile new entrants alike have flooded the space to meet that demand. In an increasingly saturated market of almost 3,900 US-listed ETFs, gathering enough assets to break even versus a fund’s expenses is a much taller hurdle than in years past.
“The timeline for success has been truncated so much,” said Amrita Nandakumar, president of ETF sub-adviser Vident Asset Management. “Four to five years ago, you might say, ‘I’m going to give this fund three years.’ I think that’s closer to 18 months now.”
“I’ve seen some really promising funds that have given up in a year because the issuer/sponsor could not afford to pay what it took to operate the fund,” she added.
Nandakumar estimates that a new ETF issuer should budget at minimum $250,000 in working capital for its first year to cover an ETF’s launch and operating costs, and that’s without “spending a dollar” on marketing. While Nandakumar says that figure is slightly lower than it was a decade ago, the ETF world’s never-ending fee war has squeezed margins for issuers — meaning the percentage of loss-making funds is on the rise.
Fund liquidations have been “a little all over the place” this year, according to Bloomberg Intelligence’s Athanasios Psarofagis — issuers big and small have shuttered funds, with both new products and older-vintage ETFs included. Notable closures included over a dozen funds focused on environmental, social and governance investing, at least 18 ETFs with “China” in their names — over twice last year’s tally — and three cannabis offerings.
Meantime, successful launches this year included the first US ETFs that track the spot price of Bitcoin and Ether, and a deluge of derivatives-powered funds that wager ultra bullish or bearish bets on the world’s most popular stocks.
Helping the fuel the record boom in new funds are two Securities and Exchange Commission rule changes from 2019 and 2020, which made it easier for issuers to create actively managed and derivatives-based ETFs. Additionally, the proliferation of white-label issuers, which handle the legal and operational processes for startup ETFs, has made it easier and faster for entrepreneurs to bring their product ideas to market.
“The barriers to entry have never been lower, but the barriers to success have never been higher,” ETF analyst Psarofagis said.
Even if an issuer can gather enough assets to cover costs and generate a small profit, long-term success and scale isn’t always a guarantee. In order for issuers to tap into the trillions of dollars of wealth overseen by institutional investors and financial advisers, they first have to be approved by the platforms that those kinds of investors use to execute trades.
Often, funds don’t just have to meet a size threshold, but also meet requirements for daily volumes and track records, says Ed McRedmond, founder of etfEd Advisory, which consults issuers on distribution strategies.
That’s not to say all of 2024’s rookie funds will flop. Leveraged, single-stock ETFs have been a hit among traders. An offering from Defiance and it’s white label issuer, Tidal, that tracks two-times the returns of MicroStrategy Inc. has amassed over $1.6 billion in assets since debuting in August. Several single-stock funds from GraniteShares have surpassed the $200 million mark in mere months.
“They’re not having success in launching some type of slightly different fixed-income ETF or slightly different general equity exposure ETF,” said McRedmond, pointing to noteworthy new offerings from firms like GraniteShares and Defiance. The debuts capturing investors’ attention are “very niche products.”
McRedmond also credits this year’s success stories to luck and knowing your audience. He noted that most of those funds have been marketed directly to retail traders instead of the institutional investors that are often behind gatekeepers.
Still, challenges remain for the hundreds of other funds that launched this year and have yet to draw in significant flows.
“It’s harder today than it was yesterday, and it’s going to be harder tomorrow,” Vident’s Nandakumar said.
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