* ETFs closing after months of going live
* Some expect further closures soon
By Jessica Toonkel
NEW YORK, Aug 10 Recent exchange-traded fund
closures are raising new questions as to whether the ETF market
has passed its prime.
Just in the past week, Scottrade announced it is shutting
down its ETF business, Russell Investments said it is
considering a similar move and Direxion Shares said it was
closing a number of ETFs.
Experts say a consolidation of the $1.2 trillion industry
may be ahead as firms contend with tightening margins, an
increasingly crowded ETF market and growing reluctance by
executives to invest in marketing new products.
Already, ETF closures are on pace to surpass shutdowns last
year. With the recent announcements, 33 ETFs are set to close by
month-end compared with 38 for all of 2011, according to Ron
Rowland, president of Capital Cities Asset Management Inc.
Rowland, who has $16 million in assets under management,
publishes the Invest With an Edge newsletter, which tracks ETFs
likely to close.
"Asset management firms are struggling," said Paul Justice,
director passive fund research at Morningstar Inc.
"What it comes down to is it's no country for new funds."
Direxion, a Boston-based provider of primarily leveraged and
inverse ETFs, said last Friday it was closing nine ETFs because
they failed to gather assets.
Days later, both Scottrade's FocusShares LLC unit said it
was closing its entire lineup of 15 ETFs and Russell Investments
said it was conducting a "strategic review" of its $309 million
ETF business, both after just a little over a year of entering
the ETF market.
That is not to say that the $1.2 trillion U.S. ETF market is
going to dry up and disappear. But Justice and other experts
said the days when companies launched many ETFs to see which
would stick are over.
Given how crowded the ETF market has become, firms need to
spend more than ever on marketing and sales, said Ben Cukier, a
partner at FTV Capital, a New York-based private equity firm
that invests in ETF providers.
"It has never been easy to be in this business, but the
challenges have changed," Cukier said. "It used to be that
advisers didn't know what ETFs were, but now there are thousands
of ETFs out there and the challenge is how to get the advisers'
Since 2010 the number of ETFs, not including exchange traded
notes, has jumped 31 percent to 1,268 at the end of July from
967 at the end of 2010, according to Rowland.
That means firms need to not only come up with ETFs that are
not yet available, but they also need to invest in the sales and
marketing to get heard above the noise, said Christian Magoon, a
Chicago-based ETF consultant.
For FocusShares, this will mark the second time the firm is
closing its ETF lineup. The St. Louis-based firm had a series of
niche ETFs, which it closed during the financial crisis in 2008.
In 2010, Scottrade, the St. Louis-based online brokerage
firm, bought FocusShares and launched 15 ETFs all tracking
indexes developed by Morningstar Inc in 2011.
The funds, which altogether have $100 million in assets,
will liquidate on Aug. 30, the firm said on Aug. 6.
A FocusShares spokesman declined to comment.
Similarly, when Russell Investments announced in January
2011 that it had bought U.S. One, an active ETF provider, and
then proceeded to launch six ETFs shortly thereafter, industry
observers said the firm could become a big ETF player.
The firm tapped former iShares executives, including James
Polisson as managing director of Russell's global ETF business
and Andrew Arenberg as managing director of global ETF
But observers say that, despite their expertise, Russell,
like FocusShares, did not invest in selling the ETFs.
"The products are fairly me-too," said Dave Nadig, director
of research at IndexUniverse. "They are not the only game in
Calls to Polisson were not answered by voicemail or by an
assistant. Steve Claiborne, a spokesman, said the review would
be complete within the month and that 30 jobs would be cut in
New York and San Francisco.
Nadig estimates that an ETF can start to break even at $100
million. There are 573 ETFs that are over one-year old that have
less than $100 million in assets, according to Lipper.
For Direxion, the decision to shut down the nine ETFs did
not just have to do with their small size, said Andy O'Rourke,
director of marketing.
"We have smaller funds that we think will do well in the
future, but we just did not see that with these funds," he said.
All of the ETFs that Direxion is closing, which include the
Direxion Daily Latin America Bear 3X Shares and the
Direxion Daily Agribusiness Bull 3X Shares have a very
narrow focus and had a hard time attracting investors, he said.
The nine funds had $26.3 million in assets. The firm will
still have 52 ETFs after the closures, which make up most of the
firm's $6.2 billion in assets.