The shuttering of XShares' AirShares EU Carbon Allowances Fund ( ASO) adds a note of sobriety to the ETF success story amid the renewed rush to bring funds to market.ASO is not the first ETF to close its doors, and it will not be the last. As the blossoming ETF industry prepares to go toe-to-toe with mutual funds, it has already experienced some thinning in its ranks. In 2008 nearly 50 ETFs were forced to fold as methodologies that looked good on paper failed to perform in the open market. Viability can often be sensed from trading volume, and the black and white numbers that roll across the trading tape give weak funds nowhere to hide. XShares' ASO is not the only narrowly focused XShares fund to get the ax. In June 2008 XShares closed down seven realty funds. In August 2008, XShares shut down 15 HealthShares ETFs that focused on themes like cancer and enabling technologies. At the time, the parent company's interim Chief Executive Joseph Schocken noted the closed funds were "those ETFs that didn't resonate with investors." In November 2008, XShares managers filed a law suit against former company managers and officers, charging breach of fiduciary duty, breach of loyalty duty, theft of business opportunity, corporate mismanagement, misappropriation of corporate assets, self-dealing and fraud. While XShares has undoubtedly seen more than one factor affect the success of their product line, the overwhelming reason for fund closings has been a lack of assets and liquidity. ASO's average daily trading volume was less than 2,000 shares and its 0.85% management fee is higher than the 0.75% charged by also-struggling competitor iPath Global Carbon ( GRN).
Both ASO and GRN command very little trading volume, but investors should not expect to see GRN disappearing anytime soon. The iPath line of ETNs spawned from the same family as the highly popular iShares line. iShares has long been home to popular products such as iShares S&P 500 Index ( IVV) and iShares Russell Midcap Index ( IWR), which pay for themselves and their less-successful peers. While the closing of ETFs may be a pain for shareholders, the Darwinian result has helped take poor performing products off the market. Upstart ETF issuers have to be lean and mean, delivering products that customers want and taking aim at ETF standards offered by other fund groups. The industry is experiencing a fundamental shift, however, highlighted by the recent BlackRock ( BLK) acquisition of iShares. The players at the top of the ETF industry are getting bigger and asset managers like Schwab ( SCHW) will soon be offering their own line of products. Here's to hoping that consumers will continue to demand excellence and that the viability of funds will keep the ETF universe from becoming bloated.