U.S. Markets closed

Key Risk: Large number of sub-­scale ETFs face shutdown risk

Aniket Ullal of First Bridge Data

First Bridge ETF landscape & risk report (Part 6 of 6)

(Continued from Part 5)

Shutdown Risk: Large Number of Sub-­Scale ETFs

Though ETF assets in the US have been growing, the most successful funds account for a majority of the assets. Currently, 47% of ETFs in the US are sub-scale (<$75M in assets) and cumulatively they account for < 1% of assets, putting them at risk of shutdown.

Source: First Bridge global ETF database; Data as of Nov 29, 2013

In theory when an ETF delists and liquidates, investors should receive cash equivalent to the fair value of the securities held in the fund. In practice however, most money managers would prefer to avoid this scenario. For example, a delisted ETF may not always liquidate immediately. There may also be downsides related to reputation and taxation. Having a simple way to identify shutdown risk can be important.

Several idiosyncratic factors could cause an ETF to shut down e.g. an ETF sponsor exiting the market entirely. This makes it difficult to predict accurately which ETF will be shut down. The net asset level for an ETF is the simplest indicator for monitoring potential shutdown. We judge ETF net assets of <$75MM to be indicative of high shutdown risk, between $75MM and $500MM to be moderate risk and more than $500MM to be low risk. It is important to note that this metric is conservative and a ‘blunt instrument’, since there are several ETPs that have low assets but may not be closed since they are a piece in a broader fund family. However, we believe net assets is a good starting point to assess shutdown risk.

As of end November 2013, there were 1531 ETPs listed in the US. Of these, only the 1373 listed for at least a year prior to this cutoff date (the ‘eligible universe’) have been included in this table, since recently launched ETPs need time to gather assets. Almost half the ETPs listed fall in the ‘high risk’ of shutdown category.

Browse this series on Market Realist: