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Tough Climate Will Close Many ETFs


The 17 exchange-traded funds Northern Trust Corp. has decided to close will have plenty of company in the exchange-traded fund graveyard before the year is out, experts predict.

That's because, after rapid multiplication in recent years, ETF supply has finally outrun demand, said Ronald Rowland, president of Capital Cities Asset Management in Austin, Texas.

"The number of new ETFs just mushroomed in 2007 and 2008," he said. "Too many products came to market too fast."

The shakeout could claim more than 100 funds this year, according to Rowland, who publishes an online "Deathwatch" for ETFs and exchange-traded notes, a similar type of investment. Updated each month, the list stands at 153 for February, not including the Northern Trust Northern Exchange Traded Shares, or NETS. The list consists of 120 ETFs and 33 ETNs that are at least six months old and failed to have an average daily value traded of at least $100,000 during January.

Last year, 164 ETFs were introduced and 46 were closed, according to State Street Global Advisors. In 2007 and 2006 combined, the firm said, 434 new ETFs were introduced, and there are currently more than 700 on the market, SSgA said.

Grabbing Market Share

The winners of the shakeout are likely to be the large, well-established brands such as Barclays Global Investors, State Street Global Advisors and Vanguard, Rowland said. "I think this is a case where the big are going to get bigger," he said. Certain niche families, such as ProShares, can succeed as well, he said.

Barclays Global Investors had the largest share of the ETF market at the end of 2008, with 48.3%, according to SSgA. Commitment to the business will help to separate the winners from the losers, said Noel Archard, head of product development for Barclays' U.S. iShares business.

"I think in some cases, firms have underestimated the amount of dedication and investment you have to make to be successful," he said. "And that's certainly going to be exacerbated by the type of market conditions we're in."

Barclays, which launched dozens of iShares ETFs over the past couple of years, expects to expand its lineup this year, Archard said. "I anticipate us having another strong year," he said. The company does not expect to prune away any of its ETFs, he said.

Archard said he would not be surprised if "a couple" of the smaller ETFs fell off the map this year, particularly those at smaller sponsors. One benefit a large institution like Barclays has is that it can subsidize small funds until they grow large enough to throw off profits, he said.

Northern Trust announced Jan. 27 that its Northern Exchange Traded Shares would not trade after Feb. 9 and that they would close on Feb. 20. The 17 funds, had $33 million of assets at yearend.

Too Small for Survival

That is too small for survival, said George Simon, a partner at the Chicago law firm Foley & Lardner LLP. "Any ETF family that doesn't have several hundred million dollars in assets" is in danger, he said. Smaller funds are less profitable for their sponsors, and their lack of liquidity makes them less attractive to investors, he said.

Rowland called Northern Trust's funds "great products."

"Northern Trust just failed to do enough marketing," he said. "The bottom line is that nobody knew about them."

Another factor that might prompt a bank to exit the ETF business is a fear of losing custodial business from competing fund sponsors, Simon said.

Steven Fradkin, Northern Trust's chief financial officer, said the company concluded it could not compete with larger, more established ETF providers.

Despite the closures, the ETF industry had a strong 2008. At the end of the year, 13.8 billion shares were outstanding across the industry, up 52% from 12 months earlier, according to SSgA Strategy & Research and Bloomberg. Because of investment performance, assets fell 12% during the year, according to SSgA Strategy & Research and StyleADVISOR.

Invesco Aim Releases 401(k) Benchmarking Tool

Invesco Aim has launched a new retirement marketing tool that allows plan sponsors to benchmark and review 401(k) plans.

The tool is actually an enhanced version of its Invesco Aim PlanForward Module 3, which is a product-neutral marketing program that gives financial advisers an opportunity to provide plan sponsors with an in-depth 401(k) review. The review includes: an analysis of plan design, investments and participant behavior, and plan oversight; easy access to the right data for effective benchmarking and plan comparison.

"The newly designed module in our PlanForward series offers multiple tools and resources to help retirement plan financial advisers review and benchmark plans, a compelling attribute given recent regulatory and economic developments," said Terry Kelly, national sales manager in the retirement division of Invesco Aim Distributors.

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