ETF Market Thriving Despite Challenging Conditions

Equity and fixed income markets have struggled this year, weighed down by investor worries around geopolitical tensions and inflation. Despite this market turmoil, investors still seem to be turning to ETFs to position their portfolios for the current environment.

While the pace of asset inflows has slowed relative to last year, ETFs have seen over $267 billion in net inflows through June 3.

However, net flows are not the only sign of a healthy ETF marketplace. Through the end of May, 171 new ETFs have become available for U.S. investors. This beats last year’s pace, where 154 new products had been launched by the end of May.

Industry watchers know that by the end of 2021, a record 477 new ETFs had been launched. While time will tell whether this year will continue to outpace the last, the fact that issuers are feeling optimistic about developing new products in a very different economic environment shows the tenacity and versatility of ETF issuers.

Closures Remain Low

Data on ETF closures tells a similar story, especially when viewed in the context of the last several years. Through the end of May, 37 ETFs have shut down.

This outpaces the level of closures that we saw last year, where only 21 ETFs had been taken off the market by the end of May. In fact, 2021 saw only 79 closures in total – far below the triple digit pace set in the years pri

But the number of closures is still far lower than we saw in calendar year 2020. It is intuitive that in a difficult market environment, ETF closures would be more likely. Without market appreciation, it is harder for funds to reach an asset level that enables the manager to break even on the product.

This year’s market drawdown is obviously much shallower than that experienced in spring 2020 but it also more prolonged. With recession fears brewing, it is possible that this is a metric that could pick up steam in the second half of the year.

One data point around closures does differentiate this year from any year prior – ETF issuers are becoming quicker to pull the plug on funds that aren’t working.

So far this year, over 16% of closed funds were on the market for less than a year and over a third of closed funds were given less than two years to gain traction. That’s a marked difference from 2019, where nearly 65% of closed funds had been around for 5 years or more.

One reason for this might be the increase in niche thematic funds. The past few years have seen the launch of many ETFs that are meant to capitalize on a hot trend in the market. Should the trend the ETF is meant to offer exposure to fizzle out, the likelihood of the fund becoming or staying profitable is unlikely, even with another year of marketing efforts.

However, it is also possible that some of these funds could see success if given a bit more time. Early this year, Direxion shut down a pair of ETFs that seemed to be well-suited for choppy markets.

The Dynamic Hedge ETF and Flight to Safety ETF were both designed to mitigate risk in volatile market environments. Both ETFs launched in 2020, a time when markets seemed to only move up. Had these funds not shut down in January, perhaps it might have been their time to shine.

But with 6 new launches, Direxion’s overall lineup has grown this year. Most recently, the firm launched the Breakfast Commodities Strategy ETF, a unique take on agricultural commodities with a fun ticker, BRKY. With agricultural commodities seeing price appreciation due to the war in Ukraine, this ETF is positioned to take advantage of investor interest in this specific area of the market.

Competition Higher Than Ever

Overall, the firm is a tangible example of what all this launch and closure data is telling us. The ETF industry is becoming more competitive by the day. The overall number of available products keeps growing, giving investors a dizzying array of products to choose from and making a solid marketing strategy more important than ever.

And while every fund won’t be a hit or get lucky in terms of timing, issuers stand ready to adjust their investment lineups based on the environment and investor interest. This flexibility and willingness to quickly adapt will continue to help ETFs become the investment vehicle of choice for more and more investors, driving flows into these products.

While market performance may be struggling this year, the ETF industry is alive and well.

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