The European ETF industry is on course to record the highest annual number of fund closures since the inception of the market in 2000, according to research from Refinitiv.
Despite continuing to grow its assets under management (AuM) over the course of 2020, Refinitiv's newly published 'ETF Deathlist' has predicted record closures for the ETF market, although head of EMEA research Detlef Glow does not believe this represents the beginning of a "wider consolidation" for the industry.
Glow explained that "the high number of ETF closures in Europe goes in line with high launching activity" rather than consolidation and added that "a lack of profitability" may have caused the high number of closures.
"Within the current market environment, a number of fund and/or ETF promoters are reviewing their product ranges for products that have a lack of profitability and/or might be out of fashion, as margins and, therefore, overall profits in the asset management industry came under pressure for various internal and external reasons."
The European ETF industry grew from €870bn to €874bn between 31 December 2019 and 31 October 2020, according to data from Refinitiv, which only constitutes a 0.5% increase. However, Glow noted that this increase was achieved with negative market performance of €46.2bn, which was outweighed by estimated net sales of €50.5bn.
Of the 1,689 portfolios on offer in the European ETF industry, a figure that has consolidated primary and convenience share classes, only 31 have made the 'ETF Deathlist' (see below), which is defined as funds "which may face the risk of closure over the course of the next 12 to 18 months".
Initially, 826 funds were discounted from the list as they hold more than €100m in AUM, leaving 863 still for consideration, which represents a total of 51.1% of products available, but only 3.4% of industry AUM.
The pool of possible closures was also reduced by excluding any funds younger than three years old, which held more than €100m in at least one month of the observation period and contained more than €10m at the end of October 2020.
This brought the list to 88 funds, which was finally carved down to 31 ETF portfolios when any fund which had gathered more than €10m AUM at least once between November 2017 and October 2020 were removed.
Of these, 21 ETFs were equity products, six were bond funds, three were alternatives and one was unclassified, ranging from AUMs of €480,000 to €9.4m.
Glow said that some of the funds that made the list may not necessarily face closure as they could be maintained by promoters wishing to "act as a one-stop shop" or to maintain a "long-term strategic perspective" in the respective markets.
He added some of the products are also trading-oriented ETFs, including leveraged long, short and leveraged short strategies, which are not expected to hold high AUM as the products earn money from trading activity.
Glow also suggested the list may not be complete, as, for example, the merger of Lyxor ETF and ComStage may yet lead to a consolidation of their product ranges.
He concluded: "More generally, despite the higher number of ETF closures in 2020 so far, I would not speak about a consolidation, as the European ETF industry was always very innovative and not all ETFs launched may meet investors' demand or risk appetite.
"Because of that, they will be closed. In addition, these developments are not exclusively seen in the European ETF industry because mutual funds also get closed if they don't meet the expectation of the fund promoters."
This article was first published by our sister title Investment Week