Russell ETF Closures Dilemma


In a statement released on Aug. 17 , Russell said:“Regarding the closures, while the innovation behind Russell's next-generation ETF products received substantial interest in general, the market for them is still in its early days.”

In part this is true.

Russell had—or, really, still has—a splendid array of very niche ETFs:the Russell Small Cap Low P/E ETF (SCLP), the Russell 1000 High Volatility ETF (HVOL) and the Russell Developed ex-US High Momentum ETF (XHMO), to name a few.

Perhaps the market wasn’t ready, or maybe will never be ready, for such specific investment vehicles.

However, another part of this unhappy ending for Russell shouldn’t be overlooked—the fact that the company simply couldn’t compete with the big dogs of the ETF world.

Its most popular ETF is the Russell 1000 Low Volatility ETF (LVOL) with $69 million under management. However, both the PowerShares S'P 500 Low Volatility Portfolio (SPLV) and the iShares MSCI USA Minimum Volatility Index Fund (USMV) handily beat LVOL in assets, managing $2.4 billion and $375 million, respectively.

The three funds launched within months of each other last year. But the ETF world is tough, and the competition for the lowest management fees is cutthroat. LVOL charges 20 basis points, right between SPLV’s 25 bps and USMV’s 15 bps.

Although the low fees were great for investors, it made running the funds with relatively few assets unsustainable. That’s exactly what my colleague Carolyn Hill pointed out in an earlier blog—namely that Russell’s ETF business wasn’t profitable .

Based on July 31 management fees and asset figures, Russell’s yearly revenues for its 26 funds would fall just under $1 million.

However, Russell did decide to spare one ETF from liquidation, the actively managed Russell Equity Fund (ONEF) in a gesture toward the company’s strategic shift toward actively managed ETFs.




As most investors know, passive management outperforms active strategies nine times out of 10. Also, active ETFs are significantly less popular among investors than those that track an index.

At present, actively managed funds in the U.S. enjoy a total of $8.2 billion in assets—a small fraction of the $1.228 trillion of total assets. In addition, passive funds are in general much cheaper.

ONEF was Russell’s first ETF. However, since it launched in May 2010, it has amassed a mere $4.2 million in assets, which is less than the $5 million that most funds use as seed capital.

With an annual management fee of 0.51 percent, ONEF has the highest fees out of any of Russell’s ETF. But based on its fees and assets, yearly revenue for ONEF would average $21,500—much less than income on LVOL, which at current rates could bring in $137,755 annually.

If Russell is downsizing, why get rid of its most popular ETFs, such as the Russell Equity Income ETF (EQIN) and LVOL?

Leaving just one ETF on the market, unless it is truly something special, raises the probability of failure now that Russell has already foisted the stigma of fund closures upon itself.

What is the justification of leaving one lone survivor—an actively managed one at that—that carries a high expense ratio, trades poorly and has low investor interest already?

The IndexUniverse multifactor fund closure risk system has pegged 23 out of 26 of Russell’s funds at “medium” or “high” risk of closure. Even before Russell put out its press release late on Friday, ONEF was put in the “high” closure risk doghouse, and one has to wonder how long it will stay afloat.

It may just be a placeholder for actively managed funds to come, or maybe Russell is looking to sell its exemptive relief to a company that wants to break into the world of active ETFs.

But no matter what it does, it’s not at all clear that any new actively managed Russell ETF will be any more successful at achieving what ONEF couldn’t.


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