Exactly How Many ETFs Are Going to Close?

That is a tough question to answer, but the degree of difficulty has not stopped some from opining on the matter. With 35 ETF closures year-to-date through the end of August and more on the way, pundits are in a dither about how many existing ETFs have the potential to close in the future and what risks these possible closures may pose to investors. As is often the case with broader analysis of the exchange-traded products industry, folks become seduced by numbers, often with little to no empirical evidence to support the assertion. Regarding potential closures, the number du jour is one-in-four, or 25 percent of currently existing products. Citing the Financial Times, that was the number one market expert used on CNBC on Tuesday. Just to be clear, the point here is not to assail any media outlet or the gentleman that used the one-in-four figure. In theory, the number could be a tad higher. Using the popular ETF Deathwatch as a base, more than 25 percent of currently existing exchange-traded products stand a chance of going the way of the dodo bird. For the sake of argument, say there are 1,500 ETFs and ETNs on the market and round the August Deathwatch number up to 380 from 377 and there is a figure greater than 25 percent. Speculating on what ETFs are destined for closure is tricky business because logic can be thrown out the window in many instances. There are obviously costs to the issuer for keeping an ETF alive. One might even say marketing costs are an issue for ETF sponsors. Then again, if an ETF or ETN is in danger of closing, chances are the issuer did not spend much time or money promoting the product in the first place. The Reality One reality of the ETF business is there are haves and have nots among issuers. In particular, BlackRock's BLK iShares, State Street's STT State Street Global Advisors and Vanguard combine for over 80 percent of the roughly $1.2 trillion in U.S. ETF assets under management. Another reality is that these firms can afford to let funds that would appear to be vulnerable to closure remain in their respective stables. Said another way, State Street can afford to let the $5.9 million SPDR S&P International Consumer Discretionary Sector ETF IPD hang around because the $11.9 billion SPDR Barclays Capital High Yield Bond ETF JNK helps pick up the slack. That is just one example, but it underscores an important point. On the August 2012 ETF Deathwatch list, there were 32 iShares funds, 14 SPDRs products and four Vanguard ETFs. Translation: ETFs from the three largest fund sponsors make up 13.2 percent of the logical choices for closure. However, neither iShares, SSgA nor Vanguard have shown a tendency to close ETFs. The aforementioned IPD is over four-years-old. The $3.4 million iShares MSCI Emerging Markets Financials Sector Index Fund EMFN is approaching its third birthday. The $12.4 million iShares FTSE EPRA/NAREIT Developed Europe Index Fund IFEU is approaching its fifth birthday. Again, these are just a few examples, but IPD, EMFN and IFEU are proof positive that large ETF sponsors can let small funds hang around forever if they so choose. With 50 funds essentially taken off the list for potential closure, the one-in-four thesis is dealt a serious blow. There Is More Thirty-nine ETFs issued by Invesco's IVZ, the fourth-largest U.S. ETF sponsor, are on the August Deathwatch list. Like its three larger rivals, PowerShares has not been a frequent closer of ETFs. One might think the PowerShares Dynamic Insurance Portfolio PIC is destined for the ETF graveyard because it has just $7.4 million in AUM, but the fund is almost seven-years-old. PIC is just one example, but plenty many of the 39 PowerShares ETFs that might appear to be closure candidates are several years old. That begs the question: If these funds have not been closed yet, when will it happen? It looks like the answer is either not anytime soon or never. There are also eight Market Vectors ETFs that could be shuttered, but Van Eck, Market Vectors' parent company, does not have a deep history of ETF closures. Three PIMCO funds are on the Deathwatch list, too, but PIMCO has the resources to let its funds live for as long the company desires. Add up the PowerShares, Market Vectors and PIMCO funds that could be closed and the number is 50. The number of iShares, SSgA and Vanguard ETFs vulnerable to closure is a combined 50. There are 100 funds right there that could be closed, but very likely will not be. There are 15 First Trust ETFs on the Deathwatch list, but it is worth noting the firm has never sent one of its ETFs packing. So in a matter of minutes, the list of ETFs currently with a realistic chance of hitting the ETF dumpster has been pared to 262 from 377. For the sake of argument, assume there are 1,450 ETFs and ETNs trading in the U.S. If 262 could disappear, that works out to be about one in every 5.5 funds. Maybe it is the one-in-four theory that should go away. For more on ETFs, click here.