In a statement released on Aug. 17, Russell said:"Regarding the
closures, while the innovation behind Russell's next-generation ETF
products received substantial interest in general, the market for
them is still in its early days."
In part this is true.
Russell had-or, really, still has-a splendid array of very niche
ETFs:the Russell Small Cap Low P/E ETF (NasdaqGM:SCLP), the Russell
1000 High Volatility ETF (NYSEArca:HVOL) and the Russell Developed
ex-US High Momentum ETF (NYSEArca:XHMO), to name a few.
Perhaps the market wasn't ready, or maybe will never be ready,
for such specific investment vehicles.
However, another part of this unhappy ending for Russell
shouldn't be overlooked-the fact that the company simply couldn't
compete with the big dogs of the ETF world.
Its most popular ETF is the Russell 1000 Low Volatility ETF
(NYSEArca:LVOL) with $69 million under management. However, both
the PowerShares S&P 500 Low Volatility Portfolio
(NYSEArca:SPLV) and the iShares MSCI USA Minimum Volatility Index
Fund (NYSEArca:USMV) handily beat LVOL in assets, managing $2.4
billion and $375 million, respectively.
The three funds launched within months of each other last year.
But the ETF world is tough, and the competition for the lowest
management fees is cutthroat. LVOL charges 20 basis points, right
between SPLV's 25 bps and USMV's 15 bps.
Although the low fees were great for investors, it made running
the funds with relatively few assets unsustainable. That's exactly
what my colleague Carolyn Hill pointed out in an earlier
blog-namely that Russell's ETF business wasn't profitable.
Based on July 31 management fees and asset figures, Russell's
yearly revenues for its 26 funds would fall just under $1
However, Russell did decide to spare one ETF from liquidation,
the actively managed Russell Equity Fund (NYSEArca:ONEF) in a
gesture toward the company's strategic shift toward actively
As most investors know, passive management outperforms active
strategies nine times out of 10. Also, active ETFs are
significantly less popular among investors than those that track an
At present, actively managed funds in the U.S. enjoy a total of
$8.2 billion in assets-a small fraction of the $1.228 trillion of
total assets. In addition, passive funds are in general much
ONEF was Russell's first ETF. However, since it launched in May
2010, it has amassed a mere $4.2 million in assets, which is less
than the $5 million that most funds use as seed capital.
With an annual management fee of 0.51 percent, ONEF has the
highest fees out of any of Russell's ETF. But based on its fees and
assets, yearly revenue for ONEF would average $21,500-much less
than income on LVOL, which at current rates could bring in $137,755
If Russell is downsizing, why get rid of its most popular ETFs,
such as the Russell Equity Income ETF (NYSEArca:EQIN) and LVOL?
Leaving just one ETF on the market, unless it is truly something
special, raises the probability of failure now that Russell has
already foisted the stigma of fund closures upon itself.
What is the justification of leaving one lone survivor-an
actively managed one at that-that carries a high expense ratio,
trades poorly and has low investor interest already?
The IndexUniverse multifactor fund closure risk system has
pegged 23 out of 26 of Russell's funds at "medium" or "high" risk
of closure. Even before Russell put out its press release late on
Friday, ONEF was put in the "high" closure risk doghouse, and one
has to wonder how long it will stay afloat.
It may just be a placeholder for actively managed funds to come,
or maybe Russell is looking to sell its exemptive relief to a
company that wants to break into the world of active ETFs.
But no matter what it does, it's not at all clear that any new
actively managed Russell ETF will be any more successful at
achieving what ONEF couldn't.
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