The world of exchange-traded funds (ETFs) is experiencing a paradox: investors are flocking to these versatile instruments even as a record wave of funds shuts its doors. This trend reflects a broader shakeout, where weak products are pruned and assets migrate to larger, more established vehicles. Understanding the forces behind rising ETF closures and looming consolidation is essential for investors seeking to navigate this dynamic landscape.

Rising Wave of ETF Closures

Global closure volumes have surged to unprecedented levels. In 2023, 865 funds shut globally in 2023, marking one of the worst years on record for ETF closures. The United States is not immune: after 226 closures in 2023, the number is on track to surpass 187 for 2024, rivaling 2020’s record of 190.

This spike is driven by over 3,900 ETFs trading today, many with overlapping strategies, limited differentiation, and insufficient assets to cover operational costs. As issuers reassess profitability, funds with sluggish inflows or niche mandates face the axe, accelerating consolidation within the industry.

Forces Driving ETF Closures

Several structural pressures force ETF issuers to cut underperforming products:

• Profitability Pressures: high costs outstrip management fees for small funds, draining resources and prompting closures.
• Scale Advantages: Issuers prune lineups to focus on flagship products with economies of scale.
• Market Saturation: With thousands of ETFs, undifferentiated or overly complex offerings struggle to attract assets.
• Issuer Consolidation: Major players like BlackRock, Vanguard, and State Street drive asset concentration.

The Cycle of Launches and Pruning

The ETF market’s explosive growth has been two-sided. In 2024 alone, the US saw a record 726 new ETFs launched, targeting niches from frontier technology to thematic plays. Yet many of these products are financially unsustainable niche products that never reach critical mass.

Industry veterans refer to these at-risk offerings as the “walking dead.” Funds with under $25 million in assets—more than 1,100 US ETFs with under $25 million—operate at a loss, making them prime candidates for closure. An additional 1,500 US ETFs have below $100 million in assets, leaving a broad swath vulnerable as issuers sharpen their lineups.

Impact on Investors and Markets

When an ETF closes, remaining investors receive a liquidation payment at net asset value. While there is no immediate loss, closures can result in:

• Temporary illiquidity during wind-down periods
• Breaking of tax advantages and potential capital gains realization
• Reduced choice as product offerings shrink
• Greater concentration in core funds from large issuers

The fallout extends beyond logistics. As assets flow into established funds, the market power of the “Big Three”—BlackRock, Vanguard, and State Street—intensifies. Together, they account for trillions in global ETF assets, shaping the investment landscape and crowding out smaller competitors.

Emerging Trends and Future Outlook

Industry observers expect closure rates to remain elevated due to ongoing over-expansion and the relentless pursuit of efficiency. Several trends will shape the next chapter:

• Alternative and Active ETFs: Gaining traction amid market stresses, but still susceptible if assets stagnate.
• Themed and Niche Products: Continued innovation fuels launches, but only a fraction will achieve sustainable growth.
• Market Volatility: Downturns amplify closure risk as outflows hit less popular funds hardest.

Despite these headwinds, consolidation can yield benefits. Larger funds typically offer tighter spreads, deeper liquidity, and more robust tracking. Investors who focus on core, low-cost ETFs may find a clearer path to their goals as the market landscape evolves.

Essential Numbers At-a-Glance

Strategies for Navigating Consolidation

In a landscape where closures and consolidation drive change, investors can adopt practical steps to stay ahead:

• Prioritize ETFs with strong asset bases and consistent inflows.
• Focus on diversified, core holdings to minimize closure disruption.
• Monitor expense ratios and trading liquidity closely.
• Stay informed of issuer announcements and potential wind-down notices.

By aligning portfolios with resilient, high-scale funds, investors can harness the benefits of consolidation while mitigating the downsides of a rapidly evolving ETF ecosystem.

The surge in ETF closures underscores a critical phase of market maturation. While the culling of underperforming funds can be unsettling, it also paves the way for greater efficiency, deeper liquidity, and stronger core products. As assets consolidate around industry leaders, investors who focus on quality, cost, and scale will be best positioned to thrive in the next era of ETF investing.