The mutual fund industry takes criticism for an excessive number of portfolios—with more than 7,500 U.S. open-end funds in existence, detractors say it's more marketing behemoth at work than investing necessity. Now that exchange traded funds (ETFs) are rivaling traditional funds in asset flows, it may also match traditional funds' biggest problem of all: bloat.
The ETF industry's assets are still well short of traditional funds—even nearing $2 trillion, that's nowhere near mutual funds' $17 trillion in assets. But the more important figure is annual asset flows—and there, ETFs are not only giving funds a run for their money but in some recent years besting the fund competition. In 2008 and 2011, ETF inflows were higher than mutual fund flows, and for the past two years the race has been close to a dead heat, according to Lipper data, with traditional funds barely hanging on to their edge.
Is the biggest wave of ETF industry consolidation already a thing of the past—there's been a fairly steady state of folded ETFs in recent years—or is it just about to begin?
Be wary of fund closures
There's a good reason why investors, and not just ETF executives, should pay attention to the issue of fund closures. The amount of assets in a fund, the trading volume and whether or not the fund is part of an integrated family of funds could lower an ETF's chance of being closed, said Jim Wiandt, CEO of ETF.com.
"You don't want to be in a fund that closes," he said. "You will get your money back, but you will take a tax hit, and if you are an advisor, your clients will ask you why the fund you invested in closed."
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Currently, there are more than 1,500 ETFs, including more than 157 new ETFs launched last year, according to Morningstar, and there are hundreds of new ETFs in registration with the Securities and Exchange Commission. But the state of the market is different today than it was in the ETF industry's early years, when it was still novel to launch commodities, leveraged, inverse portfolios.
Only about 10 percent of 2013 launches gathered more than $100 million in assets and only 20 percent more than $50 million, according to a recent Credit Suisse report. "New providers continued to struggle for the most part," Credit Suisse noted. In fact, the only providers in the past four years to have accumulated more than $1 billion in assets are Northern Trust (their second attempt at ETFs, incidentally) and VelocityShares.