ETFs in 2023: A Tale of Success and Failure (2024)

Exchange-traded funds are flourishing. They raked in $598 billion in 2023, and asset managers kept expanding the ETF menu with about 520 new launches. However, behind this glossy success exists a graveyard of ETFs that didn’t make it through 2023. These closures serve as a reminder of the fierce competition among the 3,500 ETFs available to U.S. investors.

There are a few reasons why ETFs generally die. Low assets under management, high fees, poor performance, and short track records are closely associated with the probability of closure. In 2023, there were 244 ETF closures with an average age of 5.4 years and average assets under management of only $54 million. They lost 4.8 percentage points on average over the trailing one year before liquidation—a poor showing indeed. This article will unpack the 2023 closures and draw out a few lessons for the ETF industry.

Closures By Morningstar Category

ETFs in 2023: A Tale of Success and Failure (1)

Commodities ETFs Take the Top Spot

Led by Barclays’ liquidation of 23 exchange-traded notes under its iPath lineup—encompassing various commodities such as coffee, copper, and sugar—the commodities broad basket and commodities-focused Morningstar Categories combined for the highest number of closures at 30. These ETFs had ample time to gather assets, but they failed to do so. The typical ETF was 8.5 years old but had only $25 million in AUM on average over the trailing 12 months before closure. Funds like Invesco DB Silver and Invesco DB Gold launched in 2007 but couldn’t amass sufficient assets.

The crowded large-blend and large-growth categories—with around 314 and 132 funds each—came in second and third place with 19 and 15 closures, respectively. Assets managers in these segments grapple with fiercer competition and lower fees, making success in those categories an uphill battle. Aggressive competition does not afford ETFs time to establish a track record. The closed ETFs in both categories were relatively young with around 2.0 and 2.4 years of performance history, respectively.

Intense competition pushes asset managers into more esoteric and innovative products in the hopes of finding success. For example, NightShares 500 ETF, which only launched at the end of June 2022, aimed to replicate the overnight performance of 500 large-cap U.S. companies, a time when markets are closed. To do this, it bought stocks at market close and sold them at the following open. Despite its unique approach, the ETF lost 6% over its lifetime and failed to gather significant assets before its closure in August 2023.

High-octane ETFs that make up the trading-leveraged equity category came in fourth place with 12 closures, marking the category’s second-highest year of liquidations since 2006. Catering to fleeting traders and risk-seekers, these ETFs had an average life expectancy of little more than one year. This is largely because of a surge in launches in 2021 and 2022 that surpassed the total launches from the previous five years combined. Many failed to gain traction, so it’s no surprise that the category saw one of its highest levels of annual closures in 2023.

Trading-Leveraged Equity Category Launches Over Time

ETFs in 2023: A Tale of Success and Failure (2)

Active ETFs took the industry by storm in 2023, reeling in around $131 billion for the year, beating their record of $90 billion set in 2022. While active ETFs are still a small portion of the overall ETF market, they represented a sizable portion of closures in 2023. Around 43% of all closures were active ETFs, reflecting a burgeoning yet highly competitive landscape. They face even greater competition in crowded segments like the large-cap space. All but six closures in the large-growth and large-blend categories were actively managed ETFs.

ETF providers, however, weren’t patient with these strategies to build a track record. Their average age was around 2.6 years. In contrast, the average age for passive ETFs closed in 2023 was 5.9 years.

Active ETFs Launches and Closures Over Time

ETFs in 2023: A Tale of Success and Failure (3)

Top Firms

Fund providers take different approaches to product development. Some are cautious about launching new ETFs, while others swiftly respond to market trends, hoping they can attract assets. Although the latter approach carries more risks, the allure of being a pioneer in an underserved segment remains enticing. Invesco’s closure of 29 ETFs across 20 different categories in 2023—the most among U.S. providers—is a testament to these risks. Unlike the trends highlighted here, Invesco’s ETFs weren’t cost-prohibitive, and the firm was patient in giving them time to gather assets. But an average fee of 0.33% and a life span of 7.3 years weren’t enough to overcome poor performance. These ETFs lost 5 percentage points on average and had an average AUM of $150 million.

The liquidation of the Barclays iPath commodities lineup put it in the second spot at 23. These ETFs didn’t manage to gather assets.

Direxion Funds claimed the third spot with 12 closures. Direxion’s ETF closures were a microcosm of the challenges that come with niche product development. Out of the 12 closures, six were leveraged equity ETFs with an average age of little more than a year coinciding with the increased level of competition in leveraged ETFs in 2021 and 2022. Another three ETFs targeted narrow themes like breakfast commodities, such as coffee and orange juice, as well as nanotechnology and mRNA.

Closures by Firm

ETFs in 2023: A Tale of Success and Failure (4)

Lessons Learned

ETFs’ success in 2023 conceals an undeniable truth within the product development cycle: Not all strategies thrive. A rising tide won’t lift boats unable to float on their own. Some sink to the bottom before garnering enough interest to sustain themselves. But those closures provide valuable lessons.

Throwing products at the wall and praying that some stick is a risky and potentially costly approach, amplifying the likelihood of closure. But it’s not new. Invesco’s closure of 29 funds across 20 different categories stands as a testament to the perils of such an approach. Likewise, chasing niche markets with limited utility, like Direxion’s leveraged ETFs, can lead to a quick exit.

As long as flows into ETFs keep growing, asset managers will persist in trying their luck. While there is no guaranteed recipe for success, cost-effective and well-constructed ETFs with a clear purpose are poised to have an easier time attracting assets and earning their keep with investors.

3 Great ETFs That Had a Lousy 2023

The author or authors do not own shares in any securities mentioned in this article.Find out about Morningstar’s editorial policies.

ETFs in 2023: A Tale of Success and Failure (2024)

FAQs

ETFs in 2023: A Tale of Success and Failure? ›

Active ETFs took the industry by storm in 2023, reeling in around $131 billion for the year, beating their record of $90 billion set in 2022. While active ETFs are still a small portion of the overall ETF market, they represented a sizable portion of closures in 2023.

What is the best performing ETF of 2023? ›

10 Best Performing ETPs in 2023
NameMorningstar CategoryTotal Ret 2023
WisdomTree Blockchain UCITS ETF USD AccOther Equity107.60%
XBT Provider Ether Tracker Euro ETNOther89.50%
Amundi MSCI Semicon ESG Scrnd ETF AccSector Equity Technology68.00%
VanEck Semiconductor ETFSector Equity Technology63.38%
6 more rows
Jan 10, 2024

What is the ETF analysis for 2023? ›

ETFs enjoyed estimated net inflows of $870.1 bn over the course of the year 2023, while structured notes faced outflows (-$13.3 bn) over the same time period. As mentioned before, ETFs can be managed with different approaches.

How many ETFs closed in 2023? ›

ETF closures hit a three-year high in 2023 with 246 funds shuttered, which is up from 147 in 2022 and 72 in 2021. Still, the total number of ETFs continues to climb as issuers launched 529 new funds last year, which is up from 419 in 2022 and 475 in 2021.

Why does Dave Ramsey say not to invest in ETFs? ›

One of the biggest reasons Ramsey cautions investors about ETFs is that they are so easy to move in and out of. Unlike traditional mutual funds, which can only be bought or sold once per day, you can buy or sell an ETF on the open market just like an individual stock at any time the market is open.

Which ETF gives the highest return? ›

100 Highest 5 Year ETF Returns
SymbolName5-Year Return
URAGlobal X Uranium ETF22.32%
PSIInvesco Semiconductors ETF21.78%
XLKTechnology Select Sector SPDR Fund21.28%
SOXLDirexion Daily Semiconductor Bull 3x Shares21.06%
93 more rows

What is the most profitable ETF to invest in? ›

7 Best ETFs to Buy Now
ETFAssets Under ManagementExpense Ratio
Vanguard Information Technology ETF (VGT)$70 billion0.10%
VanEck Semiconductor ETF (SMH)$16.3 billion0.35%
Invesco S&P MidCap Momentum ETF (XMMO)$1.6 billion0.34%
SPDR S&P Homebuilders ETF (XHB)$1.8 billion0.35%
3 more rows
Apr 3, 2024

What Vanguard funds are doing well in 2023? ›

Top performing investment funds owned by Vanguard worldwide 2023, by one-year return. As of September 2023, the Vanguard PrimeCap Fund provided the highest one-year return rate. The Vanguard Selected Value Fund ranked second having a one-year return rate of 34.05 percent.

What is the safest stock to invest in 2023? ›

(NASDAQ:PEP) has consistently ranked among the likes of Costco Wholesale Corporation (NASDAQ:COST), Walmart Inc. (NYSE:WMT), and Berkshire Hathaway Inc. (NYSE:BRK-B) as one of the best safe stocks for long term investors. Click here to continue reading and check out 5 Safe Stocks To Invest In For The Long-Term in 2023.

What is the best stock to invest in 2023? ›

Top-Performing Stocks of 2023
  • Coinbase.
  • Nvidia.
  • DraftKings DKNG.
  • Meta Platforms META.
  • Palantir Technologies PLTR.
Jan 2, 2024

How long should you hold an ETF? ›

Similarly, you should consider holding those ETFs with gains past their first anniversary to take advantage of the lower long-term capital gains tax rates. ETFs that invest in currencies, metals, and futures do not follow the general tax rules.

Why not invest in ETF? ›

Market risk

The single biggest risk in ETFs is market risk. Like a mutual fund or a closed-end fund, ETFs are only an investment vehicle—a wrapper for their underlying investment. So if you buy an S&P 500 ETF and the S&P 500 goes down 50%, nothing about how cheap, tax efficient, or transparent an ETF is will help you.

Can an ETF go to zero? ›

For most standard, unleveraged ETFs that track an index, the maximum you can theoretically lose is the amount you invested, driving your investment value to zero. However, it's rare for broad-market ETFs to go to zero unless the entire market or sector it tracks collapses entirely.

Does Warren Buffett use ETFs? ›

Warren Buffett owns 2 ETFs—this one is better for everyday investors, experts say.

What are the 4 funds Dave Ramsey recommends? ›

And to go one step further, we recommend dividing your mutual fund investments equally between four types of funds: growth and income, growth, aggressive growth, and international.

What is the ETF contrary to Jim Cramer? ›

EXCLUSIVE: Inverse Cramer ETF Shuts Down — How The Magnificent 7 Stocks Factor In And 'A Broken Clock Is Right Twice A Day' An ETF that generated headlines in October 2022 is shutting down. The ETF gave investors a way to bet against investor and television personality Jim Cramer.

What are the most promising ETFs for 2024? ›

Best ETFs as of April 2024
TickerFund name5-year return
SOXXiShares Semiconductor ETF30.70%
XLKTechnology Select Sector SPDR Fund24.57%
IYWiShares U.S. Technology ETF24.09%
FTECFidelity MSCI Information Technology Index ETF22.79%
1 more row
Mar 29, 2024

What stock has the most potential to grow in 2023? ›

Coinbase, Nvidia, Palantir, and other tech names dominate the list of the year's best stocks. Amid a strong stock market rally in 2023, Coinbase COIN performed best among U.S.-listed stocks covered by Morningstar analysts, as the cryptocurrency exchange platform rebounded from a steep downturn in 2022.

Which funds will do well in 2023? ›

Best Fund Families of 2023
2023 Rank2022 RankFund Family
19Putnam Investment Management
230Fidelity Investments
346PGIM Investments
443Virtus Investment Partners
41 more rows
Feb 29, 2024

What is the best place to invest money in 2023? ›

9 ways to invest your money in 2023
  • Robo-advisors.
  • High interest savings account.
  • Index funds.
  • Government bonds.
  • Micro investment.
  • Property.
  • Cryptocurrencies.
  • Forex.
Jan 15, 2024

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