Despite a lot of talk about how tough it is to get ETFs off the ground, there are still plenty of new offerings in the pipeline.
At least 363 ETFs and exchange-traded notes are currently in registration with the
Securities and Exchange Commission
, according to IndexUniverse.com. That's more than half as much as the 561 on the market right now, according to Morningstar.
And while many of the more specialized products introduced this year have been slow to gain traction with investors, a review of registration statements indicates that ETF sponsors are planning more of the same. Among the products that could be coming your way: The Claymore Robb Report Global Luxury ETF, the IndexIQ Customer Loyalty Leaders Large-Cap ETF and the Wilder Healthy Lifestyle ETF.
No doubt, exchange-traded funds, which are baskets of securities that trade on an exchange, have been on a tear this year. The first half of 2007 saw 170 new ETFs hit the market, a 133% increase over the 73 issued in the same period last year, according to Morningstar. Assets under management have surged 45% to $500.8 billion through June 30.
PowerShares launched nine new ETFs, including
PowerShares Global Water
, which posted volume of 240,000 shares on Thursday, and the
PowerShares FTSE RAFI Europe ETF
, which traded only 1,500 shares.
Ameristock listed five new fixed-income ETFs, including the
Ameristock/Ryan 2 Year U.S. Treasury ETF
. All five have an average daily trading volume of less than 1,000 shares a day.
And Claymore Securities launched eight, including the
Claymore/Clear Global Vaccine Index
, which could use its own shot in the arm. It did not trade Thursday. Same with the
Claymore/KLD Sudan Free Large-Cap Core
, which I profiled
here last month.
In fact, most of the industry's assets and trading volume are concentrated in just a few ETFs. On Thursday, the two largest, the $62.3 billion
Standard & Poor's Depositary Receipt
and the $17.65 billion
, had trading volume of 133.9 million shares and 107.7 million shares, respectively.
At the other end of the spectrum, HealthShares has 19 ETFs with total assets under management of around $77 million. On Thursday, just 700 shares of the
HealthShares Cancer ETF
changed hands. Trading in the
HealthShares Infectious Disease ETF
was even more anemic: just 100 shares. Another seven, including the
HealthShares Autoimmune-Inflammation ETF
HealthShares Cardio Devices ETF
, didn't trade at all.
All of this competition is making it harder for ETF sponsors to attract seed capital to assemble the shares necessary to start trading. Up until now, this funding has come primarily from a group of elite stock traders, known as the specialists, on the floors of the
New York Stock Exchange
and the American Stock Exchange.
ETF sponsors also rely on specialists to maintain an orderly market in the shares. They buy the component stocks or other securities to assemble new ETF shares when demand spikes, and break up ETF shares into their component securities when it wanes. This can be a profitable business for ETFs that trade heavily. But it's much less attractive to make a market in ETFs that have little trading volume.
So it seems unlikely that specialists would be willing to support all of the products currently in registration. "That window of opportunity is closing. It's getting a lot harder to secure seed capital for these products," says Joseph Keenan, a managing director at the Bank of New York.
He says the big, mainstream ETF companies have the clout to get support and backing from the specialist firms. But in "the current environment of the capital crunch among the specialists, it will probably prohibit entrepreneurial firms who don't have a lot of capital from creating their own ETFs."
This could prompt sponsors to re-evaluate the demand for some of the more esoteric ETFs currently in the pipeline, such as the Adelante Shares RE Kings, which will focus on real estate companies with low dividend payout ratios as an investment characteristic, the StreetTracks KBW Mortgage Finance ETF or the IndexIQ Effective Workforce Leaders Large-Cap.
Keenan says ETF sponsors are looking for alternative means of securing seed capital, such as
Still, industry watchers say it's likely that some products in the pipeline might be withdrawn -- or simply wither and die, since sponsors aren't required to formally pull a registration statement.
"There's no way of knowing which ones will be pulled," says Matt Hougan, editor of IndexUniverse.com.
But he adds, "I would be surprised if the Voskian Citigroup Semiconductor 50 Index ETF ever launches. It's been there for I don't know how many years."
The Voskian Funds Trust first filed for registration seven years ago -- right around the time the tech bubble burst.
Hougan says there's also chatter that the additional HealthShares ETF in the pipeline will never make it to market, given the tepid reception for the 19 current offerings. Jeffrey Feldman, chairman of Xshares, the adviser to the HealthShares funds, says the Asian Healthcare fund is delayed because of problems in India.
There has been speculation that Rydex may not come out with a slew of leveraged and reverse-leveraged ETFs in registration, according to Hougan. "The Rydex situation was up in the air because the company was for sale," says Hougan. "But now there is a real question on whether they can compete with ProShares' first-mover advantage in the space ... I would be surprised to see them launch."
Rydex spokeswoman Lori Klash says that she can't comment on products still in registration, but that the company "remains committed to the ETF space."