A Brave New World for ETFs as Success Rate Declines

ETF Trends

The ETF business in the U.S. has grown to about $1.5 trillion but it’s getting harder for firms to launch successful new products due to competition and with most asset classes already covered by existing funds.

“Despite record exchange traded product inflows, a record 102 ETPs closed last year — reinforcing the fact that it has become much more difficult to launch a successful product,” said Credit Suisse analyst Victor Lin in a recent note. “In fact, the percentage of products launched each year that turn out to be successful has been on a steady decline in recent years.”

Other Wall Street analysts following the ETF industry are reaching similar conclusions.

The barriers to entry for new ETFs and firms are “rising – not falling,” says Citigroup analyst William Katz. [Richer Get Richer in ETFs — Harder for New Entrants?]

The so-called Big Three of the ETF business – BlackRock iShares, State Street and Vanguard – control over 80% of the assets.

However, that doesn’t mean it’s impossible for other firms to launch and manage successful ETFs. [Smaller, New ETF Providers Try to Chip Away at ‘Big Three’]

For example, WisdomTree Japan Hedged Equity (DXJ) is the best-selling ETF this year with net inflows of more than $4 billion. Shares of the fund’s manager, WisdomTree Investments (WETF), have rallied over 80% year to date.

In active funds, PIMCO Total Return ETF (BOND) managed by Bill Gross has made a huge splash in the ETF’s first year.

Still, it has become much more difficult to launch a successful product in a market with so many different choices already, said Lin at Credit Suisse.

He notes that over 90% of the ETPs launched prior to 2006 could be deemed successes by garnering more than $100 million in assets. In contrast, only 36% of the products launched since 2006 have been successful in gathering $100 million in assets and 20% have been delisted altogether.

“Record inflows into ETPs have helped to mask the headwinds that issuers face when launching new products,” Lin wrote.

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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