The world's hottest investment product is showing signs of slowing down

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  • Exchange-traded fund closures hit a record high for a second straight year in 2017, according to Citigroup data.
  • The firm says that's just one signal the ETF market is maturing as traders shift how they're using the funds.

It used to be that if you wanted to attract interest in an exchange-traded fund, all you had to do was launch one. After all, as the ETF market exploded over the course of the past decade, investor demand seemed to outpace supply.

That's no longer the case, which could mean a serious slowdown as the ETF landscape matures, according to Citigroup.

The firm notes that although 2017 saw more ETF launches than the prior year, it still failed to top the roughly 270 new funds from 2015. Meanwhile, closures hit a new record in 2017 for a second straight year, Citigroup data show.

Screen Shot 2018 01 02 at 8.57.48 AMThere have been record ETF closures in each of the last two years.Citigroup

Looking further below the surface of the ETF market, Citigroup highlights another dynamic that suggests the whole landscape is shifting - and it has to do with how the funds are being used.

The firm finds that investors are increasingly using ETF for allocation purposes, meaning they're seeking broad asset class exposure, rather than making more specifically pointed trades. The two charts below highlight this, showing just how much more growth "allocation ETFs" have seen.

Screen Shot 2018 01 02 at 9.04.59 AMETFs are being increasingly used for broad allocation, rather than pointed trades.Citigroup

The shifts outlined above mirror something similar in the ETF investment strategy known as "smart beta," which takes the passive approach of mirroring an index and combines it with the more analytical practice of stock picking. Only 36 new smart-beta funds had launched in 2017 through the first week of November, on pace for the lowest annual number 2014, according to Goldman Sachs data.

All of these developments point to an ETF market that's exiting its rapid-growth phase and entering a more mature period. Sure, funds of all types will continue to be used for all sorts of trader sorcery, but it's clear that those specific applications will keep morphing over time.
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