It’s tough out there for exchange traded fund (ETF) providers. At a time when total ETF assets are surging to new highs, profitability is proving elusive for some. Last month, Russell Investments closed its passive ETFs after just two years in the business. The firm’s choice to throw in the towel is hardly surprising given a new report from the Financial Times. The report finds that more than a quarter of ETFs and notes listed in the U.S. haven’t attracted enough assets to be economically viable.
It’s a gloomy number for an industry whose growth has largely been driven by its ability to deliver liquidity and low cost. This year, for example, global assets were up 13%, hitting $1.7 trillion. But as assets grow, it’s getting harder and harder for providers to make a go of it. With more products being launched each year, assets are now spread thin and competition on price is fierce. For example, the Financial Times notes that 40 different ETFs track the Euro Stoxx 50 Index—trying to get a competitive edge on cost in that kind of environment is brutal.
All this is putting immense pressure on profits. The Financial Times found that 27% of all ETF products listed in the US and open longer than six months are economically unviable – up from 14.5% at the end of 2010. Just how unprofitable are the 377 products in question? The average fund on the list generates just $35,000 in revenue.
But as some ETFs languish, others are thriving. PIMCO’s Total Return ETF based on its flagship mutual fund has attracted $2.5 billion in assets since it launched in April. Still other ETF providers have seen their business grow as institutional investors boost their use of the products, especially in the fixed income space. According to BlackRock’s latest ETF landscape report for example, global fixed income ETP assets have grown to $309 billion and are expected to exceed $1 trillion in five years.
The highs and lows seen in the ETF space over the last year – with some funds closing and others surging ahead – is likely a sign of things to come, as investors ultimately decide which providers will succeed and which ones will succumb to cost pressures. Deep pockets will help many providers float their ETF business as the market matures. And with analysts citing tremendous room for growth in the ETF space, patience could be just the virtue needed for those providers that want to have a competitive edge in future.