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Thursday, February 21, 2019

What Really Predicts ETF Success?

News summary by MFWire's editors

"In the past few years, organic success in the ETF market has become nearly impossible."

Elisabeth Kashner
FactSet
Vice President, Director of ETF Research and Analytics
So argues Elisabeth Kashner, director of ETF research and analysts for FactSet. In a post this morning on ETF.com, Kashner digs into how increasingly difficult it is for fundsters to get their new ETF wares to take hold. The article makes for a sobering read for any fundsters active in or interested in the ETF business.

Kashner analyzes recent ETF launches from 2007 to 2016 and concludes that a key predictor (if not the key predictor) of a new ETF's success is how much assets it accumulates in year one. On the bottom end of the spectrum, 44 percent of new ETFs that reached less than $50 million in AUM in year one had shut down by the end of 2018, and 30 percent were still stuck with less than $50 million each. On the flip side, for new ETFs that surpassed more than $1 billion in year one, nearly 80 percent still had more than $1 billion in AUM by the end of 2018, while fewer than five percent had shut down.

"The overall direction is clear: The lower the assets at the end of year one, the higher the chance of closing, or of bumbling along at low asset levels," Kashner writes. "The opposite also holds true: The higher the assets at the end of the first year, the greater the chance of the fund thriving in years to come."

Kashner analyzes some specific launch successes. (Unsurprisingly, it helps to have a big parent who can feed other assets into a new ETF.) And she also notes that the ETF closure rate has been rising for five years, even as the ETF launch rate wobbles into what seems like a plateau. There are still more launches (268 in 2018) than closures (155 in 2018), though. 

Edited by: Neil Anderson, Managing Editor


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