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The ETF industry is taking giant strides, swelling up with new products regularly and undergoing a radical change when it comes to themes. Be it a bull or a bear market, launches have hardly stalled.
Total market cap was about $2.38 trillion in early August (as per xtf.com), with contribution from about 1,948 ETFs. In the second quarter itself, over 60 ETFs entered the market followed by about 40 ETFs launched in the first quarter (read: Successful ETF Launches of Q1).
About 300 ETFs were launched in 2015 compared with approximately 180 ETF initiations in 2014, about 150 in 2013 and nearly168 rollouts in 2012. Bloomberg Intelligence indicated that four ETFs are being launched on average worldwide per day since the end of 2014.
Not only this, a considerable number of ETFs are in the pipeline, pointing to growing investor interest in exchange-traded products (read: 5 Very Successful ETF Launches of 2015).
Kudos to innovative and fresh themes, these products have always held investors’ attention despite the peaks and troughs of the market. Transparency, diversification benefits and low cost are behind the ETF industry’s spectacular journey.
Also, since most ETFs look to follow the well-regarded market indexes, that rebalance quarterly, these normally experience lower turnover compared with actively managed funds. This in turn leads to fewer “taxable events” that result in tax liabilities (read: ETFs and Taxes--What Investors Need to Know).
Is the Space Getting Crowded?
ETFs bear less risk than stocks. Also, funds have gone beyond plain vanilla concepts. Smart-beta ETFs have now taken charge. Multi-factor, ESG-based, sector-based and several thematic and niche ETFs are being rolled out lately.
Be it millennials, the Health & Wellness theme, longevity, drones, video gaming or 3D printing, there is an ETF to serve every purpose.
But still, aren’t there too many products?
While existing issuers are diversifying their ETF offerings on varied themes to cash in on investors’ demand, others are joining the league hoping to capitalize on opportunities.
However, some industry experts are of the view that launches are unnecessarily high. Asset-management firms “risk attracting investors to products at the wrong time” as per Vanguard CEO F. William McNabb III.
As per Morningstar, most investors would like to keep it simple and go for low-cost products from the array of offerings on the market. Morningstar analyst noted that “most of us could build a perfectly suitable, low-cost portfolio selecting a small handful of the 100 largest ETPs.” One analyst forecast that “The industry has fallen prey to its own success,” as per an article published in the Financial Times.
Why Things Are Probably Not That Exciting in Smart-Beta Space
Ultimately, the underlying trend in the market plays it role in pushing up or pulling down a new fund, no matter how smart it’s theme is or how sound its fundamentals are. For example, smart-beta ETF BioShares Biotechnology Clinical Trials Fund (BBC - Free Report) has lost 27.5% so far this year (as of August 5, 2016), as the winds are against biotech investing.
Even a quality approach with dividend growth feature could not save WisdomTree Japan Hedged Quality Dividend Growth Fund from losing about 12% this year as the yen has been stronger for the most part.
Plus, investors should note that amid such a flurry of innovative products, the highest asset gatherers’ spot has been retained by plain vanilla ETF SPDR S&P 500 ETF (SPY - Free Report) with $196.13 billion. SPY has offered year-to-date gains of 8.13% (as of August 5, 2016).
On the other hand, iShares Russell 1000 Growth ETF (IWF - Free Report) is the top-grossing smart-beta ETF with $30.5 billion of assets followed by iShares Russell 1000 Value ETF (IWD - Free Report) with $29.2 billion. IWF is up over 6.5% so far this year (as of August 5, 2016) and IWD has added 9.6%.
Compared to these majors, new smart products have managed to amass paltry assets. Definitely, there are many options for investors who eye a specific segment, but otherwise many theme-based ETFs often end up gathering small assets and eventually have an early closure.
So far this year, around 60 products have closed followed by about 198 closings in 2015, 176 in 2014 and around 138 in 2013, as per etf.com. Within the funds that have been withdrawn, many were structured smartly but simply failed to float.
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Too Many ETFs Flying in the Market?
The ETF industry is taking giant strides, swelling up with new products regularly and undergoing a radical change when it comes to themes. Be it a bull or a bear market, launches have hardly stalled.
Total market cap was about $2.38 trillion in early August (as per xtf.com), with contribution from about 1,948 ETFs. In the second quarter itself, over 60 ETFs entered the market followed by about 40 ETFs launched in the first quarter (read: Successful ETF Launches of Q1).
About 300 ETFs were launched in 2015 compared with approximately 180 ETF initiations in 2014, about 150 in 2013 and nearly168 rollouts in 2012. Bloomberg Intelligence indicated that four ETFs are being launched on average worldwide per day since the end of 2014.
Not only this, a considerable number of ETFs are in the pipeline, pointing to growing investor interest in exchange-traded products (read: 5 Very Successful ETF Launches of 2015).
Kudos to innovative and fresh themes, these products have always held investors’ attention despite the peaks and troughs of the market. Transparency, diversification benefits and low cost are behind the ETF industry’s spectacular journey.
Also, since most ETFs look to follow the well-regarded market indexes, that rebalance quarterly, these normally experience lower turnover compared with actively managed funds. This in turn leads to fewer “taxable events” that result in tax liabilities (read: ETFs and Taxes--What Investors Need to Know).
Is the Space Getting Crowded?
ETFs bear less risk than stocks. Also, funds have gone beyond plain vanilla concepts. Smart-beta ETFs have now taken charge. Multi-factor, ESG-based, sector-based and several thematic and niche ETFs are being rolled out lately.
Be it millennials, the Health & Wellness theme, longevity, drones, video gaming or 3D printing, there is an ETF to serve every purpose.
But still, aren’t there too many products?
While existing issuers are diversifying their ETF offerings on varied themes to cash in on investors’ demand, others are joining the league hoping to capitalize on opportunities.
However, some industry experts are of the view that launches are unnecessarily high. Asset-management firms “risk attracting investors to products at the wrong time” as per Vanguard CEO F. William McNabb III.
As per Morningstar, most investors would like to keep it simple and go for low-cost products from the array of offerings on the market. Morningstar analyst noted that “most of us could build a perfectly suitable, low-cost portfolio selecting a small handful of the 100 largest ETPs.” One analyst forecast that “The industry has fallen prey to its own success,” as per an article published in the Financial Times.
Why Things Are Probably Not That Exciting in Smart-Beta Space
Ultimately, the underlying trend in the market plays it role in pushing up or pulling down a new fund, no matter how smart it’s theme is or how sound its fundamentals are. For example, smart-beta ETF BioShares Biotechnology Clinical Trials Fund (BBC - Free Report) has lost 27.5% so far this year (as of August 5, 2016), as the winds are against biotech investing.
Even a quality approach with dividend growth feature could not save WisdomTree Japan Hedged Quality Dividend Growth Fund from losing about 12% this year as the yen has been stronger for the most part.
Plus, investors should note that amid such a flurry of innovative products, the highest asset gatherers’ spot has been retained by plain vanilla ETF SPDR S&P 500 ETF (SPY - Free Report) with $196.13 billion. SPY has offered year-to-date gains of 8.13% (as of August 5, 2016).
On the other hand, iShares Russell 1000 Growth ETF (IWF - Free Report) is the top-grossing smart-beta ETF with $30.5 billion of assets followed by iShares Russell 1000 Value ETF (IWD - Free Report) with $29.2 billion. IWF is up over 6.5% so far this year (as of August 5, 2016) and IWD has added 9.6%.
Compared to these majors, new smart products have managed to amass paltry assets. Definitely, there are many options for investors who eye a specific segment, but otherwise many theme-based ETFs often end up gathering small assets and eventually have an early closure.
So far this year, around 60 products have closed followed by about 198 closings in 2015, 176 in 2014 and around 138 in 2013, as per etf.com. Within the funds that have been withdrawn, many were structured smartly but simply failed to float.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>