New ETFs Profitability

New ETFs Profitability

As the probability for ETF profitability declines new launches have been increasing, especially in the Market Bets objective.

For this report, I have compiled ETF launches into quarterly classes. Since 2013, new ETF launches for funds currently in operation, has grown to around 50 per quarter, from roughly 30 previously.

While ETF launches are growing, the assets for each graduating class, so to speak, are declining. Of course, you’d wouldn’t expect recent ETFs to have reached asset maturity. Even so, median per ETF fund assets for the past year is running around $14 million.

The spike in the above chart is from a 2004, 1st Quarter group launch from Vanguard. (Keep in mind these are now-current assets).

Here’s a quick chart of the ETF class of 2014, Q1.

The average of the 14 Vanguard ETFs is currently $16 billion in assets.  It took Vanguard roughly 2 1/2 years to reach $250,000 in charged expenses for funds that are all less than 10bps.  Interestingly, the iShares fund, ITOT, also tracked the Vanguard average in assets.  However, that fund is at 3bps.

Now let’s look at annual ETF closures data.

Since 2008 there have been around one thousand ETF fund closures, mostly ETFs in established firms with a profitable ETF fund business.

Until 2011 no more than 60 ETFs closed each year. Since 2012, ETFs closures have been rising yearly, from 69 to 154 closures in 2018. If the trend remains, by 2025 ETF closures might run over 200 per year.

There seems to have only been a short period, between 2011 and 2012 when new funds went down and closures went up.

Profitability Questions

What is the minimum of assets one needs to keep an ETF in business?  Can an ETF be run for less than $250,000 in operational costs, money the fund must pay outside exchanges, lawyers, administrators, auditors, etc–stuff no fund manager could do themselves?

In today’s 2,300 ETFs, almost 1,000 collect less then $250,000 in fees. Of course, large managers benefit from economies of scale. But even for them, I can’t see any fund collecting less than $100,000 adding to the bottom line. There’s no way for any manager to escape exchange fees, outside counsel, audit fees, etc. There are 700 ETFs in that profitability-challenged group.

Looking at the firms running ETFs, there are around 100 ETFs that are part of firms with less than $500,000 in ETF expense revenues.

For firms with under $5 billion in ETF revenues, it looks like there are between 50 to 100 ETF providers who would find it difficult to remain in the ETF fund business if there was a multi-year bear market. Although some of them have diverse revenue streams, it’s hard to see how running an ETF family would help one’s private wealth management business, for example.

It seems the ETF industry reached its saturation point sometime after 2014. Since then ETF launch success has been following the general trend in securities asset valuation growth.

There is an interesting trend in recent ETF launch types. More of them are being launched as betting vehicles then investments in real assets. Currently, I calculate 1% of ETFs in assets, around $50 billion, are dedicated to betting some aspect of the market. In number of ETF funds, however, they make up 18% of the market. The percentage is expanding. In the past 4 quarters 25% of all ETF launches have been to help investors bet, or hedge against, some kind of market movement.

Conclusion

Since 2008 both the number of ETF launches and closures as grown. Recently, there has been an acceleration in launches, especially in the market betting space. There seems to be no pressure to launch ETFs with an eye on short-term profitability.  Even the most powerful managers, launching the least expensive funds, must wait more than 2 years for the funds to begin paying for themselves.

In assets, the Market Bets space remains small.

Max @ maxdatabook.com

Please note, this is a cursory study. There may be inaccuracies, not small. If you are interested in a deeper analysis please contact me through e-mail and we can set up a time to talk.