Welcome to ETF IQ, a weekly newsletter dedicated to the $14 trillion global ETF industry. I'm Bloomberg News reporter and anchor Katie Greifeld. Programming note: This is our last newsletter of the year! We’ll see you in 2025.

Boom and Bust

The ETF industry’s banner year comes with an asterisk. 

Almost 200 funds have shut down so far in 2024, following last year’s all-time worst tally and nearly matching 2020’s pace of liquidations. That’s the flipside to a frenetic year which has seen more than 700 new funds begin trading — the second straight year of record launches.

The numbers illustrate a painful dynamic: as the ETF arena’s product pipeline speeds up, more funds are getting left behind. With investors funneling trillions of dollars toward the tax efficient and relative low costs of the ETF wrapper, veteran issuers and high-profile new entrants alike have flooded the space to meet that demand. In an increasingly saturated market of almost 3,900 US-listed ETFs, gathering enough assets to break even versus a fund’s expenses is a much bigger hurdle than in years past.

“The timeline for success has been truncated so much,” said Amrita Nandakumar, president of ETF sub-adviser Vident Asset Management. “Four to five years ago, you might say, ‘I’m going to give this fund three years.’ I think that’s closer to 18 months now.” 

Nandakumar estimates that a new ETF issuer should budget at minimum $250,000 in working capital for its first year to cover an ETF’s launch and operating costs, and that’s without “spending a dollar” on marketing. While Nandakumar says that figure is slightly lower than it was a decade ago, the ETF world’s never-ending fee war has squeezed margins for issuers — meaning the percentage of loss-making funds is on the rise. 

Fund liquidations have been “a little all over the place” this year, according to Bloomberg Intelligence’s Athanasios Psarofagis — issuers big and small have shuttered funds, with both new products and older-vintage ETFs included.

“The barriers to entry have never been lower, but the barriers to success have never been higher,” Psarofagis said. 

Sign of the Times

We’ve spoken before about the boom in buffer ETFs, which use derivatives to cushion investors against downside in exchange for a cap on upside potential. The category has attracted an interesting new fan: the University of Connecticut’s $634 million endowment.

As reported by Bloomberg’s Emily Graffeo, the UConn Foundation sold almost all of its hedge fund exposure during the most recent fiscal year and bought so-called buffer ETFs, said David Ford, chairman of the investment committee.

Hedge funds have become a “victim of their own success,” with many growing so large that returns have suffered, Ford said. Instead, he says buffer ETFs are a cheaper and easier way to lessen portfolio volatility relative to using a hedge fund or structuring a bespoke trade, and come with the benefit of improved liquidity. 

“This takes the complexity out of hedging, or most of the complexity,” Ford said. “Instead of having to go to an institutional desk and say, we want to design the following options trade, it’s already prepackaged and trading.”

UConn has purchased buffer ETFs overseen by Innovator Capital Management, where the average fee for the products is 0.8%, according to data compiled by Bloomberg. Compare that to the typical fee structure of top hedge funds, which have historically charged clients 2% of assets managed and 20% of profits.

Anita Rausch, AllianceBernstein’s global head of ETF capital markets, said that to see endowments step into the industry is a natural evolution of the wrapper. 

“It’s a huge moment but it’s something to be expected. It’s what the ETFs are revered for. They’re revered for cost efficiency, they’re revered for liquidity, they’re revered for ease of ease,” Rausch said on Bloomberg Television’s ETF IQ. “They’re going away from the hedge fund, getting that same risk-management strategy in the ETF wrapper at a cheaper cost.”

In Other News

Morgan Stanley’s E*Trade is planning a suite of free funds, with a catch — only customers of the brokerage platform would be able to buy them.

A BlackRock ETF has bought municipal debt issued earlier this year in a first-of-its-kind deal that relies exclusively on blockchain technology.

 Wall Street’s printing press for complex funds is having a blockbuster year, yet a slew of these newfangled strategies are struggling to wow.

In this week’s Drill Down on Bloomberg Television’s ETF IQ, Sprott Asset Management CEO John Ciampaglia joined us to talk about the $1.5 billion Sprott Uranium Miners ETF (ticker URNM). This fund invests in companies involved in the mining, exploration, development and production of uranium. One of its biggest holdings is a physical uranium trust, so URNM has exposure to the underlying commodity as well as the miners.

Uranium is returned to the spotlight this year because of a revival of interest in nuclear energy, thanks to growing AI power demand. That’s to the benefit of uranium itself, as well as its miners, Ciampaglia said:

People have to initially start with, what is their view on the commodity itself before they make a decision on whether they want to get involved with the mining companies. The price of uranium has been one of the best performing commodities over the last five years and that obviously was following a very dark period in nuclear energy where the price was at incredibly low levels that wasn’t economic for most mining companies in the world, but that has obviously shifted. 

URNM has amassed $1.5 billion in assets since its 2019 inception and charges 0.75% annually.

Bloomberg Television’s ETF IQ is on a holiday break until the new year. Join me, Eric Balchunas and Scarlet on Monday, January 6th at noon for our first show of 2025.