Why the $100M AUM Survival Limit May No Longer Matter

Just like the contestants on a famous reality television competition’s 50th season, exchange-traded funds are duking it out to become a Survivor. 

Nearly 1,000 active ETFs entered the market last year, and Brown Brothers Harriman reported this month that 94% of the investors it recently polled said they believe the active ETF market will hit $10 trillion in assets within 10 years, which is an expected annual growth rate of 20%. But many aren’t hitting the $100 million in assets under management that’s considered an indicator of a fund’s success. In fact, only 11% of active ETFs launched in the previous three years raised more than $100 million in the first year, according to a June report by Broadridge Financial Solutions. 

Perhaps it’s time to rethink that asset-based survival rate, which Daniel Sotiroff, a senior manager research analyst for Morningstar, said has decreased over time. It may just mean fewer issuers will end up getting kicked off the island. “The cost of launching an ETF and managing an ETF has come down a lot,” he said. “Technology and innovation have crept into the system now.” 

The Tribe Has Spoken

More funds than ever are coming to market to offer investors access to thematic investing, defined outcome strategies, active fixed income and more. And while many factors play into a fund’s likelihood of survival — such as whether it’s from a large asset manager that can let it sit on the market for longer thanks to a lineup of other successful funds — fees and performance are still two of the most important: 

• “We’re in a day and age where people understand the benefits of being lower cost,” Sotiroff said. A lot of the newer ETFs are specialized with risk-reward profiles that may not pay off, such as leveraged funds. Because they’re doing something different, they’re charging higher fees but “you’ve really got to be giving people something very different that justifies those higher fees,” Sotiroff added.  
• If a fund hasn’t performed well, it’s facing a double-edged sword: It’s not growing and it’s not attracting new investors. 

As inflation has increased the minimum asset-based threshold for survival of late, cost savings due to technological advances are a powerful force pushing that threshold down, Sotiroff said. Fund managers can outsource much of the legal and operations work, and passive ETFs can especially benefit. While hesitant to share an exact threshold, Sotiroff said the survival rate is likely closer to $50 million than $100 million. 

Outwit, Outplay, Outlast. We’ve likely seen most of the cost savings of those technological innovations baked into the market by now, so if the survival threshold does continue to decrease, it will probably do so incrementally. But large language models and automation pose a question mark due to their potential for making it even easier to run a fund. “It’s hard to say where the bottom is,” Sotiroff said.