Are ETFs Ready to Burst?

After seeing record numbers in 2011, ETFs may soon see their bubble burst. Maintaining high numbers and surviving is easier said than done for this product.

With the 308 ETFs entering the market in 2011, almost 90 percent did not reach the industry profitability benchmark of $30 million in assets under management, according to data from XTF, the ETF research and advisory firm. This is a 20 percent rise from 2010’s 70 percent which had trouble achieving enough investor demand versus 2009’s 60 percent.

Why is it becoming more difficult to garner demand? You have to spread the word.

According to Ron Rowland, founder of Capital Cities Asset Management, “A few years ago, it didn’t take much to launch a successful ETF as long as you were first to the market in a particular niche.Now it takes a whole lot of marketing and media attention to get noticed. Most fund providers underestimate the amount of marketing dollars it will take to attract the asset levels they want.”

Rowland keeps an ETF “death watch” list …

This is defined as funds at a high risk of shutting down due to either not enough sizable assets or negligible trading volume. There’s been a growing trend for this list since October, with the current number at 268, representing almost 20 percent of the ETF market.

In addition to facing challenges of attracting investors and assets,the ETF market has also suffered from the financial crisis and has seen many funds close. According to ETF Database, since 2008 more than 200 ETFs have been liquidated and closed. Before then, only 10 funds had closed.

New Market Entrant

These negative numbers haven’t deterred new entrants. PIMCO will launch a new ETF (symbol TRXT) in March in the image of its Total Return Fund (PTTRX), which is the “world’s largest bond fund” with its $245 billion in assets.

Pimco founder and chief investment officer Bill Gross is optimistic about the new ETF and thinks it could become the biggest ETF in the world, surpassing the $100 billion SPDR S&P 500 ETF (NYSEARCA:SPY), according to CNN/Money.

Gross said earlier this month, “The Total Return Fund is the largest in the world, and I hope and we expect at Pimco that the Total Return ETF will be the biggest as well. We don’t always do it perfectly, as 2011 suggests, but over time we do it well, and we hope we can do the same in the ETF space as we have in the total return space over 25 years.”