Number of ETF Failures Jumps


There are about 1,500 exchange traded funds on the market today. The recent boom (and bust) of new exchange traded products is mostly in the smaller, exotic and niche end of the spectrum. The problems associated with such products include lack of performance history, illiquidity, volatility, over concentration, and sometimes (for the funds themselves) death.

A significant number of exchange traded funds (86) have crashed in flames so far this year. More small funds are on Death Watch lists.

Eighty-six exchange traded fund closings (with two to three months still to go) represents a sharp spike above the previous yearly highs of 58 in 2008 and 56 in 2009. This year, Scottrade Inc. and Russell Investments alone closed 15 and 25 exchange traded funds, respectively. ETF closings have become more routine.

With these negative developments, investment advisers who recommended these smaller exchange traded funds may not be too eager to answer a lot of questions from clients about them, according to InvestmentNews (“Recent rash of ETF closings could leave advisers red-faced,” by Jeff Benjamin).

When new fund fails to attract a certain level of money, it often shuts down. The consensus at a recent Morningstar Inc. ETF conference was that if an exchange traded fund fails to attract $80 million, it has little chance of survival.

Observers say the exchange traded fund market is saturated and more shut downs are inevitable. When an exchange traded product is liquidated, investors often end up paying the cost of winding up, as well as unanticipated capital gains taxes.

Page Perry is an Atlanta-based law firm with over 170 years of collective experience maintaining integrity in the investment markets and protecting investor rights.