Although as a whole the ETF industry is growing by leaps and bounds, a number of issuers are seeing some trouble in terms of garnering an acceptable amount of assets. In fact, while 135 funds have launched year-to-date (at time of writing), 17 have been delisted while a host of others are teetering on the brink of closing their doors as well.
One relatively new entrant into this increasingly competitive market has been FocusShares, a subsidiary of online broker Scottrade. The company sought to develop its own lineup of index tracking/commission free funds in order to hopefully compete with a number of other online brokerages that have either developed their own funds as well, or offer robust commission-free trading programs in the ETF sphere to their clients (see more in the Zacks ETF Center).
Some examples of this include TD Amertrade’s program which offers over 100 ETFs commission free across a variety of sectors, while Global X partnered with Interactive Brokers to offer a similar program on its funds for the online broker. Beyond these two, Scottrade probably also looked with envy at Charles Schwab and their wildly successful program as the model for their FocusShares lineup.
Charles Schwab, a major U.S. broker, now has 15 ultra-low cost products in its lineup include a billion dollar fund, the Schwab U.S. Broad Market ETF (SCHB). Beyond this, not a single one of the company’s other products have less than $150 million in AUM, suggesting that each of the funds are probably at least net positives for the San Francisco-based firm (read The Guide to Total Market ETFs).
With this roadmap, Scottrade undoubtedly expected an easy road with its own lineup of commission-free, low cost index funds. However, this has certainly not been the case for any of the company’s 15 funds as all of their assets combined do not equal the least popular Schwab ETF. Instead, all of the funds have less than $20 million in AUM, and six have less than five million in total assets.
Thanks to this poor track record and possibly due in part to some leadership changes, FocusShares has decided to cease trading in its family of ETFs, making a shockingly quick end to the era at the company. The firm cited market conditions, lack of investor interest and growth as its reasons for shuttering the funds, the date of which will be on August 17th. For concerned investors, the following represents a list of the funds that will not make it to the end of the month:
- Focus Morningstar US Market Index ETF (FMU)
- Focus Morningstar Large Cap Index ETF (FLG)
- Focus Morningstar Technology Index ETF (FTQ)
- Focus Morningstar Utilities Index ETF (FUI)
- Focus Morningstar Energy Index ETF (FEG)
- Focus Morningstar Small Cap Index ETF (FOS)
- Focus Morningstar Consumer Defensive Index ETF (FCD)
- Focus Morningstar Health Care Index ETF (FHC)
- Focus Morningstar Real Estate Index ETF (FRL)
- Focus Morningstar Mid Cap Index ETF (FMM)
- Focus Morningstar Financial Services Index ETF (FFL)
- Focus Morningstar Communication Services Index ETF (FCQ)
- Focus Morningstar Consumer Cyclical Index ETF (FCL)
- Focus Morningstar Industrial Index ETF (FIL)
- Focus Morningstar Basic Materials Index ETF (FBM)
While a quickly growing, and top heavy, industry like the ETF world is likely to experience some growing pains, the sudden removal of FocusShares is still somewhat of a shock. While none of the funds were that popular in the 15 months they were on the market, they did serve as a valuable deterrent for Scottrade as a way to keep ETF investors who wanted more commission-free products happy (also see Preferred Stock ETFs Explained) .
Now, it is uncertain what will prevent more ETF investors from leaving the firm, or simply joining other companies instead that offer more robust free trading opportunities in the world of ETFs.
Yet if that wasn’t enough, Russell Investments has put its direct US ETF business under review, according to the Financial Times. The company also said it would be scaling back its dedicated U.S ETF team in both the New York and San Francisco offices.
If this means that the lineup of the company’s ETFs is closing remains uncertain at this time, although it isn’t looking good for a number of the firm’s products. 15 of the firm’s 26 ETFs have less than $6 million in assets, although two, LVOL and EQIN, have crossed the crucial $50 million AUM mark, at time of writing (read Four Easy Ways to Play Beta and Volatility with ETFs).
Due to this solid performance, I personally doubt that the entire Russell lineup will be going away, and may instead be purchased or parceled off to other issuers. Either way, it looks as though we are finally getting some much needed consolidation in the ETF space and that similar situations of more fund closures could follow in the coming months, especially if investors remain shaky about the overall market outlook.
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