November 30, 2020

Monday Morning Memo: The ETF Deathlist

by Detlef Glow.

Even as 2020 was a tough year, the European ETF industry seems to be in good shape as assets under management increased from €870.0 bn as of December 31, 2019 to €874.3 bn at the end of October 2020. An increase in assets under management of €4.3 bn (+0.50%) year to date might look small for a growth industry, but these developments were driven by the performance of the underlying markets (-€46.2 bn). Meanwhile, the industry enjoyed healthy estimated net sales of €50.5 bn.

Graph 1: Assets Under Management in the European ETF Industry (in bn EUR)

Assets Under Management in the European ETF Industry

Source: Refinitiv Lipper

As overall assets under management and flow patterns for the year looked quite healthy, it is not be expected that the industry is in a consolidation mode. Therefore, it is a surprise that 2020 may mark the year with the highest number of ETF closures since the inception of the European ETF industry in 2000.

Even as some market observers may see a wider consolidation ahead for the European ETF industry and would consider the high number of ETF closures as a clear sign for this, I would not interpret the numbers in that way. From my point of view, the high number of ETF closures in Europe goes in line with high launching activity. Since not all of the new products end up meeting investor expectations, they are closed after a period of time.

Graph 2: Number of ETF Closures in the European ETF Industry

ETF Closures Year on Year

Source: Refinitiv Lipper

A possible reason for the high number of ETF closures over the course of 2020 so far might be a lack of profitability of the respective ETFs. Within the current market environment, a number of fund and/or ETF promoters are reviewing their product ranges for products that have a lack of profitability and/or might be out of fashion, as margins and, therefore, overall profits in the asset management industry came under pressure for various internal and external reasons.

Since the possible closure of an ETF is a concern for investors, we compiled a list of funds that might face the risk of a merger or liquidation in the near future. The products were placed on the list since they were not able to gather enough assets under management to be profitable for the respective ETF promoter. Even as there is no definite number available to define what level of assets under management an ETF must have to be profitable, we use €100 m as an educated guess for this purpose. It is a number that is widely accepted in the overall ETF ecosystem.

A total of 826 of the 1,689 ETF portfolios (consolidated number of primary and convenience share classes) registered for sales in Europe hold more than €100 m in assets under management. This means in turn that 863 ETF portfolios (51.10% of products available) held assets below this threshold. Even as this may sound somewhat reasonable for the distribution of assets under management a closer view on the market share by assets under management examines that the assets in the European ETF industry are highly concentrated, since the 826 ETF portfolios with more than €100 m in assets under management account for 96.60% of the overall assets under management in the European ETF industry.

With regard to these numbers, it is worthwhile to conduct a list of ETFs which may face the risk of closure over the course of the next 12 to 18 months.

How to Conduct an ETF Deathlist

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 1,689 from 2,953 available primary and convenience share classes at the end of October 2020.

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. Even as the evaluation period for ETFs is often way shorter than this, we only took ETFs into consideration which were at least three years old. This screen brought the number of portfolios from 1,689 down to 1,110. This takes also 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.

After this we screened the development of the assets under management over the course of the last 36 months. We examined the period from November 2017 to October 2020 and looked at all of the ETFs that 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 1,110 down to 358. This means that 358 ETF portfolios, 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.

Eighty-eight of the 358 funds did not hold more than €10 m in assets under management at the end of October 2020, which exposes these funds to a high risk for closure. To finally conduct the ETF deathlist, we screened these 88 funds for a minimum threshold of €10 m in assets under management at the end of every month of the observation period (November 2017 to October 2020). This final screen showed that the 31 ETF portfolios listed below failed to gather at least once more than €10 m in assets under management over the course of the last three years.

The ETF Deathlist as of October 31, 2020

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, as for example the merger between Lyxor ETF and ComStage may lead to a consolidation of the combined product range since there is some product overlap. In addition, 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.

More generally, despite the higher number of ETF closures in 2020 so far, I would not speak about a consolidation, as the European ETF industry was always very innovative and not all ETFs launched may meet investors’ demand or risk appetite. Because of that, they will be closed. In addition, these developments are not exclusively seen in the European ETF industry because mutual funds also get closed if they don’t meet the expectation of the fund promoters.

Table 1: The ETF Deathlist as of October 31, 2020

Source: Refinitiv Lipper

 

Refinitiv Lipper delivers data on more than 330,000 collective investments in 113 countries. Find out more.

 

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.

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