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

Don’t give up on this excellent trio.

2m 56s

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)


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

A record number of closures mar an otherwise banner year for exchange-traded funds. 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.

Which ETF performed the best in 2023? ›

The 10 Best-Performing ETFs of 2023
TickerFundYTD Return
IBLCiShares Blockchain and Tech ETF46.67%
SATOInvesco Alerian Galaxy Crypto Economy ETF46.41%
XBTFVanEck Bitcoin Strategy ETF40.23%
BITOProShares Bitcoin Strategy ETF39.75%
6 more rows

What is the best performing ETF in the last 5 years? ›

The Top 5 Best Performing ETFs of the Last 5 Years
  • PSI.
  • ITB.
  • SOXX.
  • SMH.
  • GBTC.
Apr 17, 2024

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.

Which ETF has the best 10 year return? ›

1. VanEck Semiconductor ETF
  • 10-year return: 24.37%
  • Assets under management: $10.9B.
  • Expense ratio: 0.35%
  • As of date: November 30, 2023.

What are the top 5 ETFs to invest in 2023? ›

These are VanEck Vectors Semiconductor ETF SMH, Invesco NASDAQ 100 ETF QQQM, Communication Services Select Sector SPDR Fund XLC, Vanguard Mega Cap Growth ETF MGK, and Vanguard Consumer Discretionary ETF VCR. These funds are likely to continue outperforming should the existing trends prevail.

Which ETF has the highest returns? ›

100 Highest 5 Year ETF Returns
SymbolName5-Year Return
XMHQInvesco S&P MidCap Quality ETF18.53%
VONGVanguard Russell 1000 Growth ETF18.51%
SVXYProShares Short VIX Short-Term Futures ETF18.50%
IWFiShares Russell 1000 Growth ETF18.41%
93 more rows

What are the three best ETFs? ›

3 Top ETFs for a Diversified Stock Portfolio
  1. SPDR S&P 500 ETF Trust. The SPDR S&P 500 ETF Trust (SPY 0.14%) mirrors the S&P 500 Index, encompassing 500 of the largest U.S. corporations. ...
  2. Invesco QQQ Trust. ...
  3. iShares Russell 2000 ETF.
May 12, 2024

What is the most profitable ETF to invest in? ›

10 Best-Performing ETFs of 2024
ETFExpense RatioAssets Under Management
WisdomTree Japan Hedged Equity Fund (DXJ)0.48%$4.8 billion
VanEck Semiconductor ETF (SMH)0.35%$17.9 billion
Simplify Interest Rate Hedge ETF (PFIX)0.50%$163 million
Global X Copper Miners ETF (COPX)0.65%$2.3 billion
5 more rows

What is the fastest growing ETF? ›

Compare the best growth ETFs
Vanguard Growth ETF (VUG)0.04%15.07%
iShares Russell 1000 Growth ETF (IWF)0.19%15.78%
iShares S&P 500 Growth ETF (IVW)0.18%14.34%
Schwab U.S. Large-Cap Growth ETF (SCHG)0.04%15.95%
3 more rows

How long should I stay in an ETF? ›

Holding an ETF for longer than a year may get you a more favorable capital gains tax rate when you sell your investment.

How long should you stay invested in ETF? ›

Hold ETFs throughout your working life. Hold ETFs as long as you can, give compound interest time to work for you. Sell ETFs to fund your retirement. Don't sell ETFs during a market crash.

Can you invest in too many ETFs? ›

The disadvantages are complexity and trading costs. With so many ETFs in the portfolio, it's important to be able to keep track of what you own at all times. You could easily lose sight of your total allocation to stocks if you hold 13 different stock ETFs instead of one or even five.

Should I invest in VOO right now? ›

Vanguard S&P 500 ETF holds a Zacks ETF Rank of 1 (Strong Buy), which is based on expected asset class return, expense ratio, and momentum, among other factors. Because of this, VOO is an outstanding option for investors seeking exposure to the Style Box - Large Cap Blend segment of the market.

Where to invest to get 10% annual return? ›

Summary of the best investments with 10% ROI
  • Private credit.
  • Individual stocks.
  • Real estate.
  • Fine art.
  • Debt.
  • A business.
  • Private startups.
  • Cryptocurrencies.
Jan 4, 2024

What ETF is better than the S&P 500? ›

Sector ETFs are another way to beat the S&P 500. While no single sector will beat the broad-market index all the time, investing in sector ETFs can pay off. With geopolitical tensions in the world, defense stocks are up this year, and that has made the Global X Defense Tech ETF (SHLD 0.32%) a winner.

Which mutual fund has given the highest return in 2023? ›

Top 10 high-return mutual funds in 2023
NameSubcategory3Y Avg Annual Rolling Return (%)
Tata Small Cap Fund Direct-GrowthSmall Cap Fund47.4%
Parag Parikh Flexi-Cap Fund Direct-GrowthFlexi-Cap Fund33.75%
ICICI Pru Technology FundSectoral Fund- Technology44.03
Bank of India Small Cap FundSmall Cap Fund43.93
6 more rows
Jul 4, 2023

Which markets will outperform in 2023? ›

Best Sectors to Invest In 2023
  • Housing Finance. With the Reserve Bank of India (RBI) raising repo rates consecutively, the housing loan interest rates have seen an uptick. ...
  • Banking. ...
  • Energy. ...
  • Automobile. ...
  • Conclusion.

What Vanguard funds are doing well in 2023? ›

Index Funds Quarterly Review Q4 2023
Fund name (Inception date)Q1 2023Q4 2023
Vanguard Total International Bond Index Fund (05/31/2013)3.54%6.54%
Vanguard Total Stock Market Index Fund (07/07/1997)7.15%12.17%
Vanguard Total International Stock Index Fund (11/29/2010)6.65%9.98%
2 more rows
Jan 31, 2024

What stocks will outperform in 2023? ›

  • Top 5 Stocks of 2023.
  • AppLovin Corporation (APP)
  • NVIDIA Corporation (NVDA)
  • Vertiv Holdings Co (VRT)
  • Palantir Technologies Inc. (PLTR)
  • Bottom 5 Stocks of 2023.
  • NovoCure Limited (NVCR)
  • AMC Entertainment Holdings, Inc. (AMC)
Dec 4, 2023

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