Within this article I will outline the main reasons for ETF promoters to liquidate or merge ETFs. In addition to the reasons below there might be several other reasons why an ETF promoter is closing an ETF. Therefore, can the list below not be seen as a complete overview.
The most obvious and most important reason to close an ETF is a lack of profitability. That said, it is not easy to evaluate if a given ETF is profitable for its promoter or not, since is largely depending of the operational set-up of the respective promoter. Generally speaking, it can be said, the smaller the ETF promoter, the more important are the assets under management of an ETF, as the income from the respective management fees might be the only stream of income for the promoter. The larger an ETF promoter or the parent organization to which the ETF promoter belongs, the higher is the possibility that the ETF promoter has different income streams from its ETF business, since the ETF promoter or its parent organization might have a securities lending platform, a large trading desk, a wealth management business, or are authorized participants for the ETFs on their platform, etc. All these different business activities can deliver large streams of income and therefore impact the profitability of an ETF for the respective promoter. It becomes even harder to evaluate the profitability of an ETF, if one takes into account that an ETF promoter may participate in one or more of the activities outlined above.
- Lack of Investor Interest
Another reason might be a lack of investor interest. Even as this is an important point for the profitability of an ETF, this is also a reason to close ETFs which are profitable. If an ETF is profitable but doesn’t attract new money over a period of several months, the ETF might be out of investor interest. In this case the ETF promoter has to evaluate if there is any chance that the respective ETF will get back on the agenda of investors, or if the resources for the management and administration of the respective ETF can be better used. If the ETF promoter comes to the conclusion that the latter is the case, they may merge the respective ETF into another ETF with a somewhat similar investment objective or risk/return-profile. If the ETF promoter doesn’t have a product in its portfolio, they may simply close the respective ETF and return the resulting cash to the investors. This kind of housekeeping is seen as necessary for all kind of fund promoters, as they don’t want to maintain an overreaching number of products under their roof.
Corporate actions are another reason why an ETF gets closed even as it might be a very successful and profitable product. Since the product ranges of the large ETF promoters do normally have overlaps in the coverage of regions, countries, sectors or even single indices, it is business as usual that these overlaps are eliminated when one ETF promoter buys another. This kind of product range clean-up is normally done by merging funds with the same or a very similar investment objective, since this is unlocking economies of scale for the ETF promoter, as an ETF merger leads to higher assets under management of the successor ETF and a better usage of resources, since an ETF merger does free up capacities in the portfolio management, product management and fund administration teams of the respective ETF promoter.
As said before, from my point of view these three reasons are only the main reasons why ETF promoters closing ETFs.
This article is taken from the ETF Yearbook 2024 which can be found on Lipper Alpha Insight (click here)
