Blog | Featured Post

ETF Market Thriving Despite Challenging Conditions

Posted by Jessica Ferringer, CFA on Jun 14, 2022 10:30:00 AM

Equity and fixed income markets have struggled this year, weighed down by investor worries around geopolitical tensions and inflation. Despite this market turmoil, investors still seem to be turning to ETFs to position their portfolios for the current environment.

While the pace of asset inflows has slowed relative to last year, ETFs have seen over $267 billion in net inflows through June 3.

However, net flows are not the only sign of a healthy ETF marketplace. Through the end of May, 171 new ETFs have become available for U.S. investors. This beats last year’s pace, where 154 new products had been launched by the end of May.

Industry watchers know that by the end of 2021, a record 477 new ETFs had been launched. While time will tell whether this year will continue to outpace the last, the fact that issuers are feeling optimistic about developing new products in a very different economic environment shows the tenacity and versatility of ETF issuers.

ETF Launches

Closures Remain Low

Data on ETF closures tells a similar story, especially when viewed in the context of the last several years. Through the end of May, 37 ETFs have shut down.

This outpaces the level of closures that we saw last year, where only 21 ETFs had been taken off the market by the end of May. In fact, 2021 saw only 79 closures in total - far below the triple digit pace set in the years prior.

ETF Closures By Year

But the number of closures is still far lower than we saw in calendar year 2020. It is intuitive that in a difficult market environment, ETF closures would be more likely. Without market appreciation, it is harder for funds to reach an asset level that enables the manager to break even on the product.

This year’s market drawdown is obviously much shallower than that experienced in spring 2020 but it also more prolonged. With recession fears brewing, it is possible that this is a metric that could pick up steam in the second half of the year.

One data point around closures does differentiate this year from any year prior - ETF issuers are becoming quicker to pull the plug on funds that aren’t working.

ETF Closure Track Record

So far this year, over 16% of closed funds were on the market for less than a year and over a third of closed funds were given less than two years to gain traction. That’s a marked difference from 2019, where nearly 65% of closed funds had been around for 5 years or more.

One reason for this might be the increase in niche thematic funds. The past few years have seen the launch of many ETFs that are meant to capitalize on a hot trend in the market. Should the trend the ETF is meant to offer exposure to fizzle out, the likelihood of the fund becoming or staying profitable is unlikely, even with another year of marketing efforts.

However, it is also possible that some of these funds could see success if given a bit more time. Early this year, Direxion shut down a pair of ETFs that seemed to be well-suited for choppy markets.

The Dynamic Hedge ETF and Flight to Safety ETF were both designed to mitigate risk in volatile market environments. Both ETFs launched in 2020, a time when markets seemed to only move up. Had these funds not shut down in January, perhaps it might have been their time to shine.

But with 6 new launches, Direxion’s overall lineup has grown this year. Most recently, the firm launched the Breakfast Commodities Strategy ETF, a unique take on agricultural commodities with a fun ticker, BRKY. With agricultural commodities seeing price appreciation due to the war in Ukraine, this ETF is positioned to take advantage of investor interest in this specific area of the market.

Competition Higher Than Ever

Overall, the firm is a tangible example of what all this launch and closure data is telling us. The ETF industry is becoming more competitive by the day. The overall number of available products keeps growing, giving investors a dizzying array of products to choose from and making a solid marketing strategy more important than ever.

And while every fund won’t be a hit or get lucky in terms of timing, issuers stand ready to adjust their investment lineups based on the environment and investor interest. This flexibility and willingness to quickly adapt will continue to help ETFs become the investment vehicle of choice for more and more investors, driving flows into these products.

While market performance may be struggling this year, the ETF industry is alive and well.

Disclosure

All investments involve risk, including possible loss of principal.

This material is provided for informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Toroso nor any of its affiliates guarantees any rate of return or the return of capital invested. This commentary material is available for informational purposes only and nothing herein constitutes an offer to sell or a solicitation of an offer to buy any security and nothing herein should be construed as such. All investment strategies and investments involve risk of loss, including the possible loss of all amounts invested, and nothing herein should be construed as a guarantee of any specific outcome or profit.  While we have gathered the information presented herein from sources that we believe to be reliable, we cannot guarantee the accuracy or completeness of the information presented and the information presented should not be relied upon as such. Any opinions expressed herein are our opinions and are current only as of the date of distribution, and are subject to change without notice. We disclaim any obligation to provide revised opinions in the event of changed circumstances.

The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Toroso or its affiliates or any of their officers or employees of Toroso accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Toroso. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of and observe such restrictions (if any).

Topics: Industry Insights

Recent Posts

We provide 1:1 due diligence meetings with ETF portfolio managers and strategists.

Contact us