David Vomund
Special to the Bonanza

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September 13, 2012
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Market Pulse: A record number of ETFs are folding

INCLINE VILLAGE, Nev. — Two ETF providers, Russell Investments and FocusShares, recently shut down nearly all their exchange-traded funds (ETFs). They aren’t the first companies to exit the ETF business. More than 70 ETFs have closed this year, which breaks the record set in 2008. There are three reasons that some ETF providers don’t attract enough investors to keep the funds open.

Companies late to the ETF game have to distinguish themselves from their competition, and it’s too late to launch an ETF in a well-established area. For example, launching an emerging market ETF at this point will likely fail because those interested in that area gravitate to the popular iShares Emerging Markets (EEM) or Vanguard Emerging Markets (VWO). For investors, it’s more attractive to trade ETFs with a lot of volume, and those with a lot of assets under management generally also trade actively.

Most companies that are now launching ETFs are targeting a very specific and narrow marketplace. In many cases the ETFs are so specific that most investors don’t understand the product. Count me in that category. For example, one of the ETFs that Russell is closing is the Russell Developed ex-US High Momentum ETF (XHMO). Most investors won’t know (or care) what that is.

Running ETFs is also becoming less profitable. Russell has $310 million in assets in its 26 funds, but its revenue is less than $1 million. It's a competitive industry and managers are slashing fees in order to compete and gain market share. Vanguard took a lead role in slashing fees, then Schwab cut them further. Running ETFs is becoming less profitable.

Are ETFs overhyped? In some cases yet, but not all. Total ETF assets continue to rise and are at a record level. The big ETFs are getting bigger and the small ETFs are closing. For investors, that’s a good thing.

— David Vomund is an Incline Village-based fee-only money manager. Information is found at www.ETFportfolios.net or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.

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Tahoe Daily Tribune Updated Sep 13, 2012 11:44AM Published Sep 13, 2012 11:43AM Copyright 2012 Tahoe Daily Tribune. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.