U.S. Markets open in 7 hrs 4 mins

Record Number of ETFs Closing This Year Amid Consolidation


Exchange traded funds are the fast-growing segment of the asset management business but some consolidation is expected as the industry weeds out unpopular funds.

Over 90 exchange traded products are expected to close in 2012, the most ever in a year, Bloomberg News reports.

The business is known for being top-heavy with the three largest providers BlackRock (BLK), State Street (STT) and Vanguard dominating market share. [ETF Providers: Go Big or Go Home?]

Recent fee cuts at some large providers including Charles Schwab (SCHW) are creating even more competition, especially in diversified ETFs where cost is an even more important factor when choosing funds. [Smaller ETF Firms Feeling the Heat]

Some smaller firms are prospering, however, by offering specialized ETFs that use leverage or track nontraditional benchmarks that don’t weight stocks by market cap, for example. [WisdomTree Welcomes ETF Fee, Index Wars]

In the past five years, ETFs have tripled in number to 1,450 while assets have more than doubled to $1.3 trillion, according to Bloomberg.

However, some ETF providers are shutting down funds that have failed to gather significant assets.

“There’s been much made of the shockingly high pace of ETF launchers,” Michael Iachini, managing director of ETF research at Charles Schwab Investment Advisory, told Bloomberg. “With that comes the realization some products get launched and don’t really find investors who want to buy them. In order to succeed in the ETF space, a product has to either be first or better.”

Inflows to exchange traded products listed around the globe slowed to $9.5 billion in October from $43.3 billion in September, which was the best month of the year. Year-to-date global ETP flows of $192.3 billion have already surpassed 2011’s full year total of $173.4 billion. ETP flows for the January-October period were the strongest since 2008, according to BlackRock.

“You can be successful being a smaller provider,” said Deborah Fuhr, co-founder of research firm ETFGI, in the Bloomberg story. “But many people think if they’re going to enter a business, they want to be one of the top players, and breaking into that top three is something that’s challenging.”

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.