by Detlef Glow.
While looking at the comments of market observers on the European ETF industry, one often comes across articles predicting wider consolidation in the European ETF market. Even though these articles have been around for years, there has been no concurrent general consolidation taking place in the European ETF industry. While some ETFs were closed and some ETF promoters were bought by others, in general consolidation would mean there would be fewer promoters or ETFs afterward. This might have been the case right after the single actions were taken, but on a calendar-year basis it hasn’t been true at all. That said, a consolidation is a sign of a maturing market and would therefore not be a bad sign for the industry. Another fact that speaks against a consolidation in the European ETF industry in the near future is its steady growth in assets under management, mainly driven by net new sales.
These net new sales are the fuel for new product offerings and also for the launch of new ETF promoters, since active asset managers want to capture their share of this growing market. On the other hand, it is a fact that the flows and assets under management in the European ETF industry are highly concentrated, and even though some newly launched ETFs are able to gather some hundred million euros in assets under management very quickly, others struggle to gather any assets at all.
Is There an ETF Death List?
Since investors don’t want to invest in ETFs that might close very quickly, it is worthwhile to look at the ETF industry on a fund-by-fund basis to see if there are some funds that are more likely to be closed than others. In other words, since investors want to stay away from graveyard funds, they might want to see a list of ETFs that may be liquidated or merged in the near future.
Assets Under Management as a Measure
Since profitability is a key measure for companies, it is fair from my point of view to assume that ETF promoters want to run ETFs that are profitable for them. In this regard it would be good to know how many assets under management an ETF needs to be profitable. Even though industry participants often mention 100 million euros in assets under management as a general breakeven amount, this sum may vary widely between the different ETF promoters, depending on the setup of the promoters and the ETFs themselves. Another point that needs to be taken into consideration is the age of a given ETF, since the majority of ETFs can’t be blockbusters that gather a billion euros within the first three months after launch; they may need some time to get to their breakeven point. Even though it appears a bit long from my point of view, three years is a good period to see whether an ETF has gathered investor attention or not.
By the end of May 2017 there were 2,183 instruments (primary funds and convenience-share classes) listed as ETFs in Europe, according to the Thomson Reuters Lipper database. Implementing a filter on that universe based on the criteria above; i.e., showing all ETFs that didn’t have more than 100 million euros in assets under management at the end of each of the last 36 months (June 30, 2014–May 31, 2017), unveils that there were 404 ETFs registered for sale in Europe that never had assets under management above 100 million euros anytime in the last three years. This meant that 18.5% of the ETFs registered for sales in Europe were at risk of being closed by the ETF promoters. If all these funds were to be closed within a short time horizon, one could speak of a consolidation; it would mean the number of products available to investors was shrinking. The impact of closing these ETFs could not be neglected, since these 404 ETFs hold a combined approximately 11.2 billion euros in assets under management.
Nevertheless, not all of these ETFs are at risk of being merged or liquidated in the near future, since they might be profitable because of the efficient setup of the promoter or because they are needed to complement the product offering of a promoter. This is especially true for ETFs in equity sectors or duration bands.
In this regard, we analyzed the ETFs registered for sales in Europe by implementing a 50-million-euros threshold filter. This analysis showed there were 249 ETFs available to investors in Europe that did not hold more than 50 million euros in assets under management anytime during the last 36 months. The combined assets under management of these ETFs at the end of May 2017 stood at 3.8 billion euros.
Since even 50 million euros in assets under management might be enough to be profitable, we analyzed the ETFs registered for sale in Europe by implementing a 10-million-euros threshold filter. This analysis showed there were still 40 ETFs available to investors in Europe that did not hold more than 10 million euros in assets under management anytime over the last 36 months. Although some of these funds were complementary for the product ranges of the respective promoters and some were sector funds where the assets under management should increase sharply once the sector gains favorability with investors and the promoters can harvest their first-mover advantage, these funds are at a high risk of been merged or liquidated sooner or later. The closure of these 40 ETFs would in my opinion still not mark a consolidation, since the ETF promoters may launch a similar number of products over the same or a slightly extended timeframe. I would see such a cleanup of product ranges as a sign of the maturity of the ETF industry and not a consolidation.
The views expressed are the views of the author, not necessarily those of Thomson Reuters.
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