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Why Some ETF Ideas Don’t Stick Around

editor@etftrends.com (ETF Trends)

The exchange traded fund industry is a business, and like any business, a sponsor will cut down on any money losing ventures.

For instance, BlackRock Inc. (BLK), the money manager behind the iShares line of ETFs, is shuttering 10 ETFs this month, despite each of the funds posting gains this year, reports Rachel Evans for Bloomberg.

“We regularly review our ETF line-up to ensure the funds are meeting the current and future needs of our clients,” BlackRock spokesman Paul Young said.

Most surprisingly, the fund provider closing the books on the iShares MSCI Emerging Markets Latin Amer (EEML) , which has surged 37.9% year-to-date. However, the outperformance is not enough when the ETF only has $9.9 million in assets under management.

On average, the various BlackRock ETFs set to close held about $30 million of investors’ money each.

SEE MORE: BlackRock’s iShares to Liquidate 10 ETFs

The rising number of ETF closures has corresponded with the exponential growth of the ETF industry as a whole. Liquidation is becoming commonplace after ETF assets under management doubled over the past five years.

More companies have been throwing ideas out to see what sticks and are more willing to cull failed products. The so-called group of zombie ETFs – those with little trading activity or investment – have been among the most likely ETF candidates for a purge as providers seek to streamline offerings.

“It’s good to have the weeding out,” David Perlman, an ETF strategist at UBS Wealth Management, told Bloomberg. “From a performance perspective an ETF can be a success, but if no one’s owns it, it’s not going to survive. Assets are a big part of it – it’s definitely not the only factor, but you need to hit a certain threshold to continue your existence.”

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There are currently 1,944 U.S.-listed exchange traded products with $2.4 trillion in assets under management, according to XTF data. The number of ETFs has increased 5.4% this year, with 148 new funds lunched and 49 delisted. Between 2013 and 2015, liquidations and delistings across the U.S. jumped to 200, or up almost 50% from the previous three years, according to Bloomberg data.

The majority of investors’ money is allocated among the largest ETFs as volume begets volume. On the other hand, of the 226 funds launched in the past 12 months, only 21 have gathered more than $100 million in assets. Perlman argued that funds need about $75 million to $100 million to survive a culling.

It all comes down to costs. An index-tracking ETF may cost a provider $250,000 to operate every year after a initial startup expense of at least $2 million, Sam Masucci, chief executive of ETF Managers Group, said. More specialized or niche products may require even more capital to sustain them.

SEE MORE: ETF Strategists Help Investors Protect, Grow Their Serious Money

Other factors that may weigh on the future outlook for an ETF may include a product’s strategy. If investors don’t like what the ETF is tracking, then the future looks dire. Second movers may also step into an overcrowded space dominated by a first mover. Additionally, a fund’s methodology may become outdated or no longer a flavor of the month.

For more information on the ETF industry, visit our current affairs category.