Many New ETFs Face NFL Syndrome

First, a personal anecdote to explain the NFL/ETF analogy that follows here. Several years ago, I was watching a professional football game with my uncle, a voracious NFL fan, when I mentioned a player (I don't remember who it was) that was a great college football player but never made it in the NFL.

My uncle said to me: “You know what NFL stands for, right? Not for long.”

Indeed, professional football careers are brief. The NFL Players Association puts the number at a mere 3.3 years. Again, that is short. A mere stint. Data from the world of exchange-traded funds indicate that ETFs that have come to market over the past five years suffer from "not for long" syndrome as well.

Related Link: The NFL Misery Index

The Syndrome, Its Symptoms And Preventative Characteristics

One in five ETFs that have come to market since 2010 have been closed, and less than 30 percent of the remaining ETFs that have launched over the past five years have reached the much ballyhooed $100 million in assets under management threshold, according to Markit data.

In the United States last year, the number of exchange-traded products available to investors swelled to 1,843, an increase of nearly 200 from 2014, but that increase is a net number factoring in closures. Last year, more than 280 new exchange-traded products came to market in the United States alone. Arguably more interesting is the increase in number of issuers, which surged to 94 from 71, according to ETFGI data.

“This has led some industry watchers to ponder whether the ETF industry becoming too crowded. This holds especially true given that the 1000 plus funds launched in the last five years now manage roughly $300 billion of AUM or roughly 15 percent of the US listed total. Essentially, the bulk of $1trn of net AUM growth over the last five years has gone to existing incumbent products,” said Markit.

The research firm added fewer than one in 20 new ETFs launched over the past five years has eclipsed $1 billion in assets under management.

Escaping NFL Syndrome

On that note, it is worth examining what some of the most successful new ETFs in recent years have in common. The SPDR DoubleLine Total Return Tactical ETF TOTL is just two weeks shy of its one-year anniversary and already has $2 billion in assets. TOTL's success proves it helps when a new ETF comes to market with star power. In TOTL's case, its star power comes courtesy of bond king Jeff Gundlach.

Another ingredient to a new ETFs' success is the issuer procuring large commitments for the fund from institutional investors before or soon after the fund comes to market. BlackRock, Inc. BLK's iShares unit did that in 2013 when it partnered on several new ETFs with the Arizona State pension system, including the iShares MSCI USA Value Factor ETF (iShares Trust VLUE).

State Street Global Advisors (SSgA), the third-largest U.S. ETF issuer, followed suit late last year when it brought three smart beta ETFs to market with about $1 billion in combined assets that were developed in partnership with the Alaska Permanent Fund Corporation (APFC).

Goldman Sachs Group Inc GS launched three ETFs last year, and the funds now have over $850 million combined assets thanks in large part to heavy institutional support.