August 10, 2012 / 8:06 PM / in 5 years

ETF closures show market getting tougher for firms

* ETFs closing after months of going live

* Some expect further closures soon

By Jessica Toonkel

NEW YORK, Aug 10 (Reuters) - Recent exchange-traded fund closures are raising new questions as to whether the ETF market has passed its prime.

Just in the past week, Scottrade announced it is shutting down its ETF business, Russell Investments said it is considering a similar move and Direxion Shares said it was closing a number of ETFs.

Experts say a consolidation of the $1.2 trillion industry may be ahead as firms contend with tightening margins, an increasingly crowded ETF market and growing reluctance by executives to invest in marketing new products.

Already, ETF closures are on pace to surpass shutdowns last year. With the recent announcements, 33 ETFs are set to close by month-end compared with 38 for all of 2011, according to Ron Rowland, president of Capital Cities Asset Management Inc. Rowland, who has $16 million in assets under management, publishes the Invest With an Edge newsletter, which tracks ETFs likely to close.

“Asset management firms are struggling,” said Paul Justice, director passive fund research at Morningstar Inc. “What it comes down to is it’s no country for new funds.”

Direxion, a Boston-based provider of primarily leveraged and inverse ETFs, said last Friday it was closing nine ETFs because they failed to gather assets.

Days later, both Scottrade’s FocusShares LLC unit said it was closing its entire lineup of 15 ETFs and Russell Investments said it was conducting a “strategic review” of its $309 million ETF business, both after just a little over a year of entering the ETF market.

That is not to say that the $1.2 trillion U.S. ETF market is going to dry up and disappear. But Justice and other experts said the days when companies launched many ETFs to see which would stick are over.

Given how crowded the ETF market has become, firms need to spend more than ever on marketing and sales, said Ben Cukier, a partner at FTV Capital, a New York-based private equity firm that invests in ETF providers.

“It has never been easy to be in this business, but the challenges have changed,” Cukier said. “It used to be that advisers didn’t know what ETFs were, but now there are thousands of ETFs out there and the challenge is how to get the advisers’ attention.”

Since 2010 the number of ETFs, not including exchange traded notes, has jumped 31 percent to 1,268 at the end of July from 967 at the end of 2010, according to Rowland.

That means firms need to not only come up with ETFs that are not yet available, but they also need to invest in the sales and marketing to get heard above the noise, said Christian Magoon, a Chicago-based ETF consultant.


For FocusShares, this will mark the second time the firm is closing its ETF lineup. The St. Louis-based firm had a series of niche ETFs, which it closed during the financial crisis in 2008.

In 2010, Scottrade, the St. Louis-based online brokerage firm, bought FocusShares and launched 15 ETFs all tracking indexes developed by Morningstar Inc in 2011.

The funds, which altogether have $100 million in assets, will liquidate on Aug. 30, the firm said on Aug. 6.

A FocusShares spokesman declined to comment.

Similarly, when Russell Investments announced in January 2011 that it had bought U.S. One, an active ETF provider, and then proceeded to launch six ETFs shortly thereafter, industry observers said the firm could become a big ETF player.

The firm tapped former iShares executives, including James Polisson as managing director of Russell’s global ETF business and Andrew Arenberg as managing director of global ETF distribution.

But observers say that, despite their expertise, Russell, like FocusShares, did not invest in selling the ETFs.

“The products are fairly me-too,” said Dave Nadig, director of research at IndexUniverse. “They are not the only game in town.”

Calls to Polisson were not answered by voicemail or by an assistant. Steve Claiborne, a spokesman, said the review would be complete within the month and that 30 jobs would be cut in New York and San Francisco.

Nadig estimates that an ETF can start to break even at $100 million. There are 573 ETFs that are over one-year old that have less than $100 million in assets, according to Lipper.

For Direxion, the decision to shut down the nine ETFs did not just have to do with their small size, said Andy O‘Rourke, director of marketing.

“We have smaller funds that we think will do well in the future, but we just did not see that with these funds,” he said.

All of the ETFs that Direxion is closing, which include the Direxion Daily Latin America Bear 3X Shares and the Direxion Daily Agribusiness Bull 3X Shares have a very narrow focus and had a hard time attracting investors, he said.

The nine funds had $26.3 million in assets. The firm will still have 52 ETFs after the closures, which make up most of the firm’s $6.2 billion in assets.

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