

This month, two ETF providers in the US announced they were closing shop. First up was FocusShares (associated with the online brokerage Scottrade), who will shutter its entire roster of 15 ETFs. Then on August 17—the same day the FocusShares ETFs ceased trading—Russell ETFs declared it will close all of its passively managed funds in October.
ETF closures are not particularly newsworthy in the US: some 48 other funds have called it quits since the beginning of 2011, and there will no doubt be many more as the market evolves. But I think these latest closures are much more significant, and here’s why: these were genuinely good products.
As the ETF market has exploded in the last six or seven years, all manner of exotic, narrowly focused products have sprouted up like weeds. Not only is it unsurprising that many failed to attract investor interest, it’s heartening. It was hard to shed a tear over the demise of the HealthShares family of funds that included ETFs specializing in Dermatology & Wound Care, Metabolic-Endocrine Disorders and Autoimmune-Inflammation. Is it any wonder they pulled the plug on these terminally bad ideas?
Even FocusShares had an earlier line of laughable products that was euthanized in 2008. One held companies in casino, alcohol and cigarette business and called itself the FocusShares ISE SINdex Fund (SINdex, get it?). Another held only suppliers for Wal-Mart. Meanwhile, the list of ETFs that closed earlier this year tracked Taiwanese small-caps and the Russian ruble.
Nice guys finish last
But these latest closures are different. The 15 FocusShares ETFs on the chopping block were based on mainstream Morningstar indexes, and they were all extremely cheap. There was a broad-market U.S. index fund with a management fee of just 0.05%. There were large-cap, mid-cap and small-cap ETFs. And finally there were 11 sector funds, all with fees between 0.12% and 0.19%. To top it off, clients of Scottrade could trade them with zero commissions. As low-cost options go—at least for US stocks—only Vanguard can compete with that.
The Russell ETFs are much more specialized, but we’re hardly talking about Dermatology & Wound Care. The family includes a number of growth, value and momentum ETFs, others that screen for low- and high-beta stocks, and a couple of dividend ETFs. Remember, too, that Russell is one of the best-known index providers in the world, and some $80 billion is invested in funds that track Russell benchmarks. The news that they’ve abandoned the passive investing business is significant.