If there is anything Wall Street does exceptionally well, it’s create investment products that generate fees. Analysis and insight? Not so much. Even when a product performs well though, if it happens to be the rare case that it doesn’t generate enough fees – watch out. It might get killed. Such is the case with 10 iShares Exchange Traded Funds this month.
For the second August in a row, Blackrock Inc., the manager of the iShares ETF family has decided to close 10 exchange traded funds. Why? Because they failed to generate enough investor interest & capital (read: management fees). One ETF in particular, the iShares MSCI Emerging Markets Latin America ETF (symbol EEML) was performing quite well, up nearly 38% year-to-date. Why did Blackrock kill EEML? There was a paltry $8.6 million in the fund, not nearly enough to make it worth Blackrock’s effort. So what happens to the happy investors – those who own EEML and are enjoying a nice gain? They’ll get their money returned to them AND have the pleasure of paying capital gains taxes, whether they wanted to or not. But not to worry. Blackrock has another ETF that those investors can buy into. In fact, there are over 340 total iShares ETFs that they can choose from – all generating handsome fees to Blackrock – unlike the 10 that they just killed.
We continue to believe that the exchange traded fund space is saturated – there are now more than 1,400 ETFs. Academicians will tell you that when an investment space gets saturated and too much capital has flooded into it, beware. The time is ripe for performance to revert to the mean. Does Blackrock closing 10 ETFs signal a top in the ETF business and the passive investment craze? Only time will tell, but we suspect it is an important sign post.
To see the list of this year’s dead iShares ETFs go here.