by Detlef Glow.
The closure of an investment product is always galling for investors, as they have look for a new investment opportunity. In addition, they may lose some tax advantages. Therefore, it is worthwhile to evaluate if there is at least a rough measure to predict the closure risk of a so-called ETP (which is the summary name for a larger group of exchange traded products: Exchange Traded Commodities-ETCs, Exchange Traded Notes-ETNs and ETFs). Since all ETP promoters want to generate revenues from their products, the profitability of a product might be a good predictor for the closure risk of an ETP. Unfortunately, there is no single number regarding assets under management (AUM) at which all ETPs are profitable for their respective promoter. Therefore, one has to guess where this breakpoint might be. The general assumption from market observers is that the profitability breakpoint of an ETF is at around 100 million euro in AUM, which sounds quite feasible. As there is no other information available, I use this assumption when I am compiling my annual ETF Deathlist, but started to wonder if this assumption can be backed by long-term data.
To evaluate this breakpoint and the average lifetime of products in which assets fell below or never reached 100 million euros, we analyzed all ETPs globally which had been closed (merged or liquidated) between July 31, 2006, and May 31, 2021, according to the Lipper database. Within this time span, the ETP promoters closed 3,493 products (primary share classes)—190 of these funds held assets under management of more than 100 million euros when they were closed and, in some cases, even more than 1 billion euros. Therefore, it seems to be unlikely that these products were closed because of missing profitability. In fact, a high number of these closures can—especially in Europe—be attributed to restructurings of product ranges. This is because some promoters in Europe closed ETFs in local domiciles such as France or Germany while launching new ETFs [with the same investment objective] in the international fund hubs (Luxembourg and Ireland), and then transferred the respective assets to the new products. Unfortunately, this kind of corporate action can’t be predicted by any kind of measure.
The vast majority of the analyzed products (3,141) held less than 100 million euros in assets under management when they were closed. While 2,813 of these products never reached more than 100 million euros in AUM, 291 of them held at least once between 100 and 500 million euros, 12 between 500 and 750 million euros, 13 between 750 million and 1 billion euros and 12 even more than 1 billion euros. This makes it seem like the thesis that an ETP needs more than 100 million euros in assets under management to be profitable for its promoter is true, and one can use this value as proxy to evaluate the closure risk.
A more detailed view on the lifespan of the 3,141 ETPs that held below 100 million euros in assets under management when they were closed shows that the highest number of products (509) were closed during the second year of their existence, while 507 were closed in the third year and 411 in the fourth.
Graph 1: Number of ETPs With AUM Below 100 Million Euros at Closure Date by Lifetime
Source Refinitiv Lipper
From my point of view, an astonishing 220 ETPs didn’t survive longer than one year, which means that their promoters had very high short-term expectations which weren’t met. Conversely, a surprising 301 ETPs survived longer than 10 years.
In addition, it is noteworthy Lipper had no data on the assets under management for 162 of these products, which have been excluded from the statistics above.
As for this analysis, it can be concluded that the assumptions we are using to generate our ETF Deathlist are true and can applied on a global basis. As outlined in my article around the ETF Deathlist, one has to do some additional qualitative analysis to make the list more meaningful, but in general this means literally any investor can use non-advanced quantitative measures to estimate the closure risk of an ETP, even as such a list would become quite long and, therefore, less meaningful compared to an ETF Deathlist compiled with advanced statistics and additional qualitative research to increase the quality of the predictions for a period of 12 to 24 months.
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The views expressed are the views of the author and not necessarily those of Refinitiv. This material is provided as market commentary and for educational purposes only and does not constitute investment research or advice. Refinitiv cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice.