The US exchange-traded fund (ETF) industry, boasting a staggering $10.4 trillion in assets, has experienced a year of unprecedented growth and upheaval. While record inflows and new fund launches celebrate the industry’s continued success, a wave of closures highlights the intensifying competition and challenges in the ETF landscape.
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In 2024, almost 200 ETFs have shut down, mirroring the closure rate seen during the early stages of the pandemic. This comes despite over 700 new funds entering the market, marking the second consecutive year of record launches. This dynamic illustrates a clear trend: as the ETF product pipeline expands, a growing number of funds struggle to survive.
The ETF Boom and the Struggle for Survival
Investors are increasingly drawn to ETFs due to their tax efficiency and relatively low costs. Established issuers and ambitious newcomers alike are flooding the market with new products to meet this surging demand. However, with nearly 3,900 US-listed ETFs vying for investor capital, achieving profitability has become significantly more challenging.
“The timeline for success has dramatically shortened,” explains Amrita Nandakumar, president of ETF sub-adviser Vident Asset Management. The previous three-year window for new funds to establish themselves has shrunk to approximately 18 months. This accelerated timeline, coupled with intense fee competition, puts immense pressure on new entrants.
Illustrative graph showing potential trend of ETF closures.
The Cost of Launching an ETF
Nandakumar estimates that a new ETF issuer needs a minimum of $250,000 in working capital for the first year to cover launch and operating expenses, excluding any marketing costs. Even though this figure is slightly lower than a decade ago, the ongoing fee war within the ETF industry has compressed profit margins, leading to a higher percentage of loss-making funds.
Bloomberg Intelligence’s Athanasios Psarofagis notes that fund liquidations have been widespread this year, impacting both large and small issuers, as well as both new and older ETFs. Notable closures include funds focused on environmental, social, and governance (ESG) investing, those with “China” in their names, and cannabis-related offerings.
Success Stories and Shifting Landscape
Despite the closures, 2024 witnessed several successful launches, including the first US ETFs tracking the spot price of Bitcoin and Ether. Additionally, a wave of derivatives-powered funds offering leveraged or inverse exposure to popular stocks has gained traction.
Two Securities and Exchange Commission (SEC) rule changes in 2019 and 2020 significantly contributed to this boom. These changes streamlined the process for creating actively managed and derivatives-based ETFs. Furthermore, the rise of white-label issuers, who handle the legal and operational aspects for startup ETFs, has lowered the barriers to entry for new players.
Illustrative image depicting traders on a trading floor.
“The barriers to entry are lower than ever, but the barriers to success are higher,” observes Psarofagis. Even for funds that manage to cover costs and generate profit, achieving long-term success and attracting significant assets remains a considerable challenge. Gaining access to the vast capital controlled by institutional investors and financial advisors requires meeting stringent platform requirements related to fund size, trading volume, and track record.
Niche Products and Retail Focus
Ed McRedmond, founder of etfEd Advisory, highlights that successful new ETFs in 2024 tend to be “very niche products,” such as leveraged single-stock ETFs that have resonated with retail traders. These funds often bypass institutional gatekeepers by marketing directly to retail investors.
Illustrative image showing stock information on a mobile phone, representing retail trading.
For the hundreds of new funds that haven’t yet attracted significant inflows, the path to profitability remains steep. “It’s harder today than it was yesterday, and it’s going to be harder tomorrow,” Nandakumar cautions. The ETF landscape continues to evolve at a rapid pace, demanding innovation, adaptability, and a deep understanding of investor needs to succeed.
Conclusion: Navigating the Evolving ETF Landscape
The US ETF industry’s record-breaking year underscores its enduring appeal to investors seeking efficient and cost-effective investment vehicles. However, the surge in closures serves as a stark reminder of the challenges faced by new entrants in a fiercely competitive market. Success in this dynamic environment requires a combination of innovative product development, strategic marketing, and the ability to navigate the evolving regulatory landscape. As the industry continues to mature, the ability to differentiate and deliver compelling value propositions will be crucial for long-term survival and growth.
