While exchange traded funds continue to flood the market, a record number of existing ETFs are failing or in trouble. Last year, 308 new exchange traded funds were launched, but almost 90 percent of them were unable to attract the $30 million regarded as a minimum threshold amount for profitability, according to CNNMoney (See “Is the ETF bubble about to burst?”), citing XTF, a firm that researches and advises exchange traded funds globally.
“A few years ago, it didn’t take much to launch a successful ETF, as long as you were first to the market in a particular niche,” Ron Rowland, founder of Capital Cities Asset Management, was quoted as saying, adding: “Now it takes a whole lot of marketing and media attention to get noticed. Most fund providers underestimate the amount of marketing dollars it will take to attract the asset levels they want.”
Rowland’s ETF “death watch” list includes funds that, after six-months, failed to take in at least $5 million or have an average daily trading volume of less than $100,000 for three months in a row, and are consequently at risk for shutting down. His list has been growing, and currently stands at 268, almost 20% of the exchange traded fund universe.
Since 2008, over 200 exchange traded funds have liquidated and shut down, according to the article.
The article cautions investors to be especially wary of “amped-up” exchange traded funds, such as leveraged and inverse leveraged exchange traded funds, which use derivatives to amplify price movements, and are not suitable as a long-term investment strategy, and niche funds that tend to be very narrowly focused and thinly traded.
Niche exchange traded funds are also often short-lived. When an exchange traded fund closes, shareholders often suffers large losses, and end up paying commissions and fees for a new investment to replace the closed fund. An exchange traded fund closure may also be a taxable event for the investor.
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