The ETF industry was 10 years old before it had its first casualty in 2003.  A total of four funds closed that year, a group of bond ETFs known as FITRs.  Three years passed before the next ETF fell by the wayside with the departure of the SPDR O-Strip in 2006.  At the end of 2007, the U.S. ETF industry had seen a grand total of only five ETFs meet their demise.

All that changed in 2008 with the delisting of 58 ETFs and ETNs.  The industry’s lifetime toll surged from 5 to 63.  A casual observer might blame this on the financial crisis that engulfed the market during the last quarter of the year, but in fact more than 80% of the closures were announced before the end of September.  The market crisis didn’t cause the ETF death toll to surge this year; it was more a simple case of supply and demand.

A record number of new ETFs, more than 290, came to market in 2007.  An industry of less than 200 products in 2004 exceeded the 800 level in early 2008.  A four-fold increase in the number of ETFs in just three years was too much, too fast.  There were simply more products than the market could absorb.  The demise of 58 ETFs this year is nothing more than Economics 101 at work.  There is still too much supply, and there will be more closures in 2009.

The 58 delisted ETFs of 2008 are itemized in the table below.  A common theme for the failures: basing a product on a very narrow slice of the market.  XShares Advisors suffered the most casualties, losing 26 products with the closure of seven Adelante real estate ETFs in July, 15 HealthShares in September, and another four HealthShares in December.  Claymore lost a total of 13 during the year.

Most ETFs closures are purely economic – the product failed to attract enough fee-paying assets to make it viable for its sponsor.  However, that is not the only reason.  Two ETFs were closed by design this year.  The prospectus for Claymore’s MacroShares Oil Up and MacroShares Oil Down stated that if crude oil traded above a certain price ($111) for three days in a row, then the funds would be closed and liquidated.  That of course happened in April, forcing a shut down and eventual liquidation of those two ETFs.

Three other products met their demise in a somewhat surprising way, at least to those who own them.  Exchange Traded Notes (ETNs) are different from ETFs, but they are generally lumped together when discussing ETFs.  ETNs are actually bonds (typically with a 30-year maturity) that pay no interest, and their daily value is linked to the performance of an index.  Because they are bonds, they also have a risk of default.  That is exactly what happened on September 12 when Lehman Brothers declared bankruptcy.  Lehman was the bond issuer for Opta Lehman Agriculture Pure Beta ETN, Opta Lehman Commodity Index ETN, and Opta S&P Private Equity Notes ETN.  Owners of these three ETNs may one day get about 10 cents on the dollar if they are lucky.  Chances are, they will wait a long time to learn that they will receive nothing.

Yes, the final ETF death toll was high in 2008, but it is likely to be higher in 2009.  Look for my first ETF Deathwatch of 2009 to be published in just a few days to see if your ETF is on the list.

ETF Death Toll – 2008

 

Number Ticker Name R.I.P.
1 BST Claymore/BIR Leaders 50 02/12/2008
2 CLV Claymore/Robeco Boston Partners Large-Cap Value 02/12/2008
3 CZG Claymore/Zacks Growth & Income Index 02/12/2008
4 SCV Claymore/IndexIQ Small-Cap Value 02/13/2008
5 BES Claymore/BIR Leaders Small-Cap Core 02/14/2008
6 BMV Claymore/BIR Leaders Mid-Cap Value 02/15/2008
7 MCG Claymore/Clear Mid-Cap Growth Index 02/15/2008
8 KSF Claymore/KLD Sudan Free Large-Cap Core 02/15/2008
9 JNR Claymore/Clear Global Vaccine Index 02/19/2008
10 GRN Claymore/LGA Green 02/19/2008
11 EEW Claymore/Robeco Developed World Equity 02/19/2008
12 GKA Ameristock Ryan 1-Year Treasury 06/10/2008
13 GKB Ameristock Ryan 2-Year Treasury 06/10/2008
14 GKC Ameristock Ryan 5-Year Treasury 06/10/2008
15 GKD Ameristock Ryan 10-Year Treasury 06/10/2008
16 GKE Ameristock Ryan 20-Year Treasury 06/10/2008
17 DCR Claymore/MacroShares Oil Down 06/25/2008
18 UCR Claymore/MacroShares Oil Up 06/25/2008
19 ACB Adelante Real Estate Composite 07/24/2008
20 AKB Adelante Real Estate Kings 07/24/2008
21 ACK Adelante Shares RE Classics 07/24/2008
22 AGV Adelante Shares Real Estate Growth 07/24/2008
23 AQS Adelante Shares Real Estate Shelter 07/24/2008
24 AVU Adelante Shares Real Estate Value 07/24/2008
25 ATY Adelante Shares Real Estate Yield Plus 07/24/2008
26 EOH Opta Lehman Agriculture Pure Beta ETN 09/12/2008
27 RAW Opta Lehman Commodity Index ETN 09/12/2008
28 PPE Opta S&P; Private Equity Notes 2038 ETN 09/12/2008
29 HHA HealthShares Autoimmune-Inflammation 09/19/2008
30 HHE HealthShares Cardio Devices 09/19/2008
31 HRD HealthShares Cardiology 09/19/2008
32 HHQ HealthShares Composite 09/19/2008
33 HRW HealthShares Dermatology & Wound 09/19/2008
34 HHJ HealthShares Emerging Cancer 09/19/2008
35 HHT HealthShares European Medical Prod & Devices 09/19/2008
36 HHU HealthShares GI/Gender Health 09/19/2008
37 HHG HealthShares Infectious Diseases 09/19/2008
38 HHM HealthShares Metabolic-Endocrine Dis. 09/19/2008
39 HHN HealthShares Neuroscience 09/19/2008
40 HHZ HealthShares Ophthalmology 09/19/2008
41 HHP HealthShares Orthopedic Repair 09/19/2008
42 HHB HealthShares Patient Care Services 09/19/2008
43 HHR HealthShares Respiratory/Pulmonary 09/19/2008
44 YYY Bear Stearns Current Yield 10/01/2008
45 MYP FocusShares ISE CCM Homeland Security 10/17/2008
46 SAW FocusShares ISE Homebuilders 10/17/2008
47 PUF FocusShares ISE SINdex Fund 10/17/2008
48 WSI FocusShares ISE-REVERE WalMart Suppliers 10/17/2008
49 ADE Elements Australian Dollar AUD/USD ETN 11/17/2008
50 EGB Elements British Pound GBP/USD ETN 11/17/2008
51 CUD Elements Canadian Dollar CAD/USD ETN 11/17/2008
52 ERE Elements Euro EUR/USD ETN 11/17/2008
53 SZE Elements Swiss Franc CHF/USD ETN 11/17/2008
54 NXT NYSE Arca Tech 100 ETF 12/15/2008
55 HHK HealthShares Cancer 12/23/2008
56 HHD HealthShares Diagnostics 12/23/2008
57 HHV HealthShares Drug Discovery Tools 12/23/2008
58 HRJ HealthShares European Drugs 12/23/2008