Why ETF closures hit a record high in 2020

The increase in ETF closures is not indicative of reduced appetite for passive. Tom Bailey explains the factors at play. 

Around one in every 20 exchange-traded funds (ETF) was closed in 2020, according to the Financial Times.

Making use of data provided by ETF analysis platform TrackInsight, the newspaper found that a record 297 ETFs closed in 2020. This represents 5.5% of all ETFs, an increase from previous years.

Indeed, the number of closures in percentage terms has been increasing in recent years. In 2019, 4.3% ETFs closed, up from 3.5% in 2018.

However, the increase in ETF closures is not indicative of a falling appetite for ETFs. By almost any measure, the amount of money invested in ETFs has surged in recent years. According to TrackInsight, the global ETF market finished 2020 with a record high $7.6 trillion (£5.5 trillion) under management, spread across 6,518 ETFs.

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When it comes to Europe, data provider Refinitiv notes: “Even as the final numbers are not accounted yet, it looks like 2020 will be the year with the second-highest overall inflows into mutual funds and ETFs in Europe (€449.69 billion as of the end of November 2020).”

ETFs have also got off to a good start this year, with investors adding almost $17 billion to US-listed ETFs in the first week of the year.  

Instead of being due to a lack of ETF demand, the increase in closures is the result of increasing consolidation in the industry. A spate of takeovers and acquisitions has meant that newly merged asset managers have closed duplicate funds.

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Another key reason for closures is owing to some ETFs failing to attract enough assets. The ETF market is also highly competitive, with ETFs competing by offering rock-bottom fees. However, these low fees mean that ETFs have to achieve a reasonable size to become profitable. Those that fail to achieve an adequate size are likely to be closed by their issuer.

This is particularly an issue for smaller ETF providers with less brand recognition. As the Financial Times reports, comparatively few ETFs from the giants of the market, Vanguard and BlackRock, closed.