Vildana Hajric, a Bloomberg cross-asset reporter, joins Todd Rosenbluth from VettaFi and ETF analyst Athanasios Seraphagus to dissect the surprising surge in ETF closures during a bullish market. They explore the shutdown of niche funds like those in cannabis and travel, emphasizing market saturation and innovation needs. The panel discusses failures of thematic ETFs post-pandemic and examines why even strong commodities, like gold, saw their ETFs struggle. Their insights reveal a complex landscape full of unexpected twists and evolving investor interests.
This year's significant ETF liquidations reflect the struggle of funds to attract investors despite overall market gains, highlighting disparities in performance.
The closure of thematic ETFs and oversaturated markets underscores the importance of differentiation and a strong value proposition for survival.
Deep dives
The ETF Graveyard Overview
This year has seen a significant number of ETF liquidations, with around 150 closures marking it as the third largest year for such events. This trend highlights the disparity between ETF launches and liquidations, indicating that while the market has largely thrived, many funds are struggling to attract investors. The performance of various asset classes, including stocks, bonds, and commodities like gold and Bitcoin, suggests that only those ETFs that can stand out are likely to sustain their presence in the market. Consequently, funds that fail to meet investor expectations or those that operate in oversaturated segments are often the first to be eliminated.
Themes in ETF Closures
Several notable themes emerged from this year's ETF closures, particularly in the international space and those focused on sustainable investment. Many international ETFs failed to gain traction as global markets diverged from U.S. investment performance, with certain countries experiencing stagnant growth. Additionally, thematic ETFs such as those focusing on work-from-home trends and certain ESG funds were notably absent from the market this year, as they struggled to resonate with investors following the pandemic's impact. This reflects a shift in market preferences, highlighting that some themes have already become outdated.
The Role of Thematic and Niche ETFs
The closure of several thematic ETFs, especially in the cannabis sector, emphasizes the challenges of market saturation and differentiation. Three cannabis-focused ETFs were liquidated, with successful products like MSOS demonstrating that while there is potential in niche markets, too many similar offerings can dilute investor interest. Moreover, the attempts of various funds to capitalize on transient trends failed to establish a lasting presence, largely due to a lack of unique value propositions and strong marketing efforts. This illustrates that in competitive spaces, only the best-positioned funds will survive, often leaving those that lack a robust strategy behind.
Market Signals from ETF Liquidations
The pattern of ETF closures can sometimes serve as an indicator of potential investment opportunities in related sectors. For instance, the liquidation of certain international funds could suggest a rebound in broader markets when investor sentiment shifts positively. Additionally, funds that closed prior to notable market events show a tendency for liquidity problems, as specific products fail to respond to changing market dynamics. This dynamic suggests that while some ETFs fall by the wayside, others may emerge from these market corrections, allowing for potential strategic investments.
As with humans, death is a part of life in the exchange-traded fund industry. There have been about 150 closures this year, which may be a bit surprising given how almost everything is up in the markets. So what’s behind this year’s class of liquidated ETFs? And what does it mean for investors?
On this episode of Trillions, Eric Balchunas and Joel Weber dig into the stories and answer the “why” behind some of the closures in 2024. On hand to assist is Vildana Hajric, a cross-asset reporter for Bloomberg, and Todd Rosenbluth, head of research at VettaFi.