The risk that a fund or ETF gets closed is a real risk as one can see from statistics on the activity of fund/ETF promoters regarding product closures (mergers and liquidations) and launches.
But why is an unexpected fund/ETF closure a risk for investors? First of all, an investor may not find an appropriate replacement for the closed product if he wants to maintain the position within the respective market exposure of the fund/ETF. One reason for this might be the expectations of the investor for the respective product. Another reason why an investor may want to maintain his position in a particular fund/ETF might be that the product has caused losses in the portfolio of the investor and the investor wants to keep the fund/ETF at least until there are no losses linked to the position anymore.
Furthermore, it can become expensive for the remaining investors when the costs for the fund/ETF closure is passed over to the product and not paid by the promoter.
With regard to the above it makes sense for investors to monitor the assets under management of the products within their portfolio to ensure that they don’t get caught by an unexpected fund/ETF closure. That said, professional fund/ETF selectors analyze the assets under management and fund flow trends for the products on their recommendation lists, beside some other reasons, to avoid the closure risk.
That said, since there are multiple reasons why a fund/ETF promoter closes a product, a fund/ETF closure can happen to funds of every size. But avoiding products which haven’t reached a sufficient size over an adequate time period might be a good first step to avoid fund closure risk.
Below we show an example of how one can conduct an ETF death list.
Methodology and Results
To run a valid assets under management evaluation, one needs to aggregate all assets held in primary and convenience share classes into one portfolio. In case of the European ETF industry, this brings the number of portfolios to 1,909 from 3,368 available primary and convenience share classes at the end of December 2023.
As no fund or ETF promoter can expect that a product will hit profitability shortly after it has been launched, one needs to take an appropriate time period into account when evaluating the success of a fund or ETF with regard to the assets under management held within the respective portfolio. Since professional investors often need a track record of three or more years to evaluate the performance of a fund before they add it to their buy lists, this might be an appropriate time period for an analysis based on the assets under management. Even as the evaluation period for ETFs is often way shorter than this, we included only ETFs into this analysis which were at least three years old. This screen brought the number of portfolios from 1,909 down to 1,396. This analysis does so far not take into account that professional investors expect that funds or ETFs they consider buying for their portfolios do hold a sufficient amount of assets under management before they buy them. Therefore, the growth in assets under management is somewhat considered as a hen/egg problem, since investors expect a sufficient amount of AUM, but are not willing to seed an ETF respectively. This means that ETFs with higher assets under management might be favored by investors and attract therefore even more inflows.
After this we screened the development of the assets under management over the course of the observation period (January 1, 2021, to December 31, 2023) and filtered out all ETFs which held more than €100 m in assets under management in at least one month of the observation period. This screen brought the number of ETFs which may face the risk of closure from 1,396 down to 307. This means that 307 ETFs, which are older than three years, were not able to gather more than €100 m in assets under management in at least one month over the course of the last three years.
Nineteen of the 307 funds never held more than €10 m in assets under management during the observation period, which exposes these funds to a high risk for closure.
In a last step, we analyzed the fund flows over the course of 2023 for all ETFs which never had more than €100 m in assets under management to see if there are ETFs which had outflows of more than 50% of their assets under management at the end of December 2023. This analysis showed that 12 ETFs lost more than 50% of their assets over the course of 2023. This means these ETFs are also facing a high closure risk, since it looks like these products haven fallen out of investor favor.
The ETF Death List as of December 31, 2023
A closer look at the 31 ETF portfolios listed below shows that some of these products may not necessarily face the risk of closure from a business point of view. This is because some of them may need to be maintained from the promoter’s point of view as they might want to act as a one-stop shop for associated wealth managers. Also, they might use these ETFs with a long-term strategic perspective to keep a presence in the respective markets. Besides that, there are also some trading-oriented ETFs (leveraged long, short, and leveraged short strategies) on the list which may also not be at risk for a closure. This is because these instruments are not expected to hold high assets under management since the promoter of these products earns money from the trading activity in these instruments. Nevertheless, one needs to take into consideration that this list is not complete, since we only screened the lowest tier with regard to the assets under management of the single ETFs. Implying the measures above to a higher number of assets under management will increase the number of ETFs with a high closure risk.
That said, one needs to take into account that this list does only show the smallest ETFs in the European ETF industry. This, however, does not mean that any of the other products may not be at risk for a closure, because even larger ETFs may not fulfil the profitability expectation of the respective promoter.
Table 1: Overview of ETFs with a High Closure Risk
Source: Private calculation based on LSEG Lipper data
The views expressed are the views of the author and not necessarily those of LSEG.
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.
