From mind-altering drugs to crypto-themed products, exchange-traded fund closures are mounting in what were once some of the trendiest areas of the $6.8 trillion industry.
Thematic ETFs that launched to target the buzziest market themes of the past two years are closing at a rapid pace, as rising interest rates hammer performance and send investors in search of safer options.
These niche strategies are now increasingly looking like fads, and many have assets of less than $30 million and negative returns since inception, criteria Bloomberg Intelligence says puts them at greater risk of shutting down.
Many feature technology names with stretched valuations, which are bearing the brunt of Federal Reserve policy tightening and the subsequent pullback in buyer interest as traders turn to more economically sensitive shares.
Against that backdrop, products like the Generation Z ETF (ZGEN) and the Defiance Digital Revolution ETF (NFTZ) have been among high-profile casualties.
"If you're looking at a firm that's going to consumers and investors and saying, 'Hey, we're going to build this unbelievable product. It's going to have a high-growth technology commitment, which means most of the cash flows are going to come in the future' — a great proposition with interest rates at zero, a much tougher proposition with interest rates at 4.5-5%," said Roosevelt Bowman, senior investment strategist at Bernstein Private Wealth Management.
Steady Outflows
Thematic funds have suffered outflows for nine straight months — the longest streak in at least seven years, according to data tracked by BI. It's a blow to many smaller ETF issuers, who were seeking to establish themselves with such targeted offerings.
In fact, more ETF shutdowns are likely among exotic, tech-heavy categories, according to BI.
ZGEN, which launched less than two years ago as a thematic fund with a mission to invest in firms that are teenager-friendly, closed for purchases in March. Holding companies like Tesla Inc. and Duolingo Inc., the fund's sub-advisor Alkali Fintech LLC attributed the closure to the "negative" macroeconomic climate.
Meanwhile, from Voyager to FTX, several cryptocurrency firms went bankrupt last year after coin prices declined massively. As a result, the value of nonfungible tokens — many of them cartoon pictures of apes — took a nosedive. NFTZ, touted as the world's first ETF for NFTs, closed in February.
The fund tracked blockchain-related companies and an NFT index, and was part of a greater collapse of crypto-themed products. Launches worldwide for exchange-traded products focused on digital assets have dwindled.
