Another record year for the ETF industry is pretty much in the bag. With two weeks left in the calendar year, the U.S.-domiciled ETF universe is on track to end 2016 with more funds and more assets, than ever before. ETF investors have even more choice now than they did just a year ago: 1,953 funds as of December 14, an increase of 109 over year-end 2015. ETF assets continue to grow, standing at $2.55 trillion as of December 13, up 18.6% from $2.15 trillion at the end of 2015.
Oddly, the expanding ETF census doesn’t explain the asset growth. New ETF launches in 2016 have not met with much success. Of the 223 funds that launched this year, only 11 have cracked the $100 million mark. That’s only half 2015’s total.
ETF Investors Stuck to Established Themes in 2016
There’s only one truly new idea in that group of 11: SPDR SSGA Gender Diversity Index ETF. Runner up WisdomTree Dynamic Currency Hedged International Equity Fund added a variable currency hedge to a well-established index, but otherwise broke no new ground.
The rest of 2016’s successful new launches are me-too products; bespoke strategies packed as ETNs, fund-of-funds, next-in-a-suite fillers, or late entrants to crowded spaces from old-line mutual fund issuers.
The picture looks even grimmer for new launches when you look at 2016 fund flows. In all, 84 ETFs attracted $1 billion or more this year, but only three of those were launched after 2013. Worse, one of those three was a spin-off of the real estate holdings from giant Financial Select Sector SPDR, not new investment. So, really, only two funds launched after 2013 gained $1 billion or more so far in 2016: Jeff Gundlach’s TOTL and Goldman Sachs’ Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF.
It’s fair to say that ETF investors stuck to established themes in 2016, with little appetite for innovation.
It’s not for lack of trying on the issuers’ part.
2016 saw two dozen thematic or niche ETF launches, like Global X Millennials Thematic ETF or 3D Printing ETF, but none has attracted much investor interest. The largest, SPDR FactSet Innovative Technology ETF, has assets of just over $12 million.
There’s been no repeat of 2014’s blockbuster PureFunds ISE Cyber Security ETF, which drew in $100 million in its first six weeks and over a billion in its first full calendar year.
Even 2015’s wunderkind thematic launches, SPDR S&P North American Natural Resources and iShares Exponential Technologies owe their success largely to a single client, who worked alongside SSgA and BlackRock to launch – and capitalize – these funds.
It’s been a long time since a new idea really caught hold among U.S.-domiciled ETFs.
2017's Opportunity May Lie in Consolidation
If 2017 follows suit, issuers might just decide that opportunity lies in consolidation rather than innovation. Creative destruction is an ever-present part of the ETF industry. We’ve seen 127 closures so far this year.
Issuers pulled the plug on a few highly specialized segments, such as emerging markets real estate, Indonesian small caps, and coal futures.
Yet the full-to-bursting U.S. large cap segment saw 20 new launches, but only 10 closures, drawing over $41 billion in new investment year-to-date. The net gain of 10 funds brought the total fund count there to 108.
Lately, investors have been sticking to the tried and true. If you’re not Jeff Gundlach or Goldman Sachs, or a well-established behemoth like SPY, VOO, or AGG, your ETF has probably had a rough year in the asset-gathering arena.
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