The US exchange-traded fund market is churning out new products at an unprecedented clip, creating concerns about a bubble developing - causing some investors to become more selective about which funds to support and question how many can survive, reports Reuters.
The ETF industry has exploded in size in response to regulatory changes in 2019 that allowed actively managed funds and those using derivatives to roll out new products more swiftly, while a recent regulatory decision to approve the creation of an ETF share class is likely to generate a fresh wave of products, opens new tab. But that rapid growth has prompted caution from some in the industry about supporting all of these new ETFs.
"We're certainly at an unsustainable level of launches, and we're going to have to start seeing product rationalization and closures," said Drew Pettit, US equity strategist at Citigroup, who said the product class could be heading toward a bubble.
The explosion of product has encouraged asset managers to come up with new offerings that push the limits of what the SEC has been willing to approve in the past. Over the last ten days, a group of asset managers that specialize in offering leveraged ETFs tied to individual stocks have filed with the Securities and Exchange Commission to issue leveraged funds seeking to provide three times and even five times daily upside of a handful of individual stocks. Risk guidelines laid down by the SEC in late 2020 under then-chairman Jay Clayton had capped leverage at two times. The SEC itself on Thursday said it is "unclear" whether the new filings will be approved.
Ryan Sullivan, head of buy-side Americas at FTSE Russell, an index provider, who has spent some 20 years in the ETF arena, said that financial advisers were now getting more picky about which ETFs to advise clients to buy.
"Operationally, it has never been easier to launch a new ETF, but the flip side is that having a successful launch is only getting more difficult," he said.
For most of those two decades he has worked on ETF products, he said, an ETF with $50 million to $100 million in assets typically would be on the radar screen of most financial advisers.
"Now they're saying: 'Don't call me until you have the first $200 million or so'," Sullivan said.
Whether the ETF industry can sustain its current torrid growth rate also relies on the market-makers, trading firms such as Citadel Securities and Jane Street Capital that buy or sell throughout the day to help ensure tight trading spreads.
