Russell Makes Strategic Retreat From Index ETF Business

NEW YORK (TheStreet) -- Russell Investments announced last Friday the mass closure of 25 exchange-traded funds with combined assets exceeding $300 million.

The only survivor will be Russell Equity ETF(ONEF) , which also happens to be the only actively managed ETF on the menu. The decision looks to us like a strategic move to refocus the firm's ETF business and reduce conflicts with its indexing customers.

Some analysts quickly attributed the closures to insufficient assets. This may be true in some cases. Several family members had net assets below the $5 million mark as of mid-year, according to the ETF Field Guide.

Yet, the closures also include the $70 million Russell 1000 Low Volatility(LVOL) and the $50 million Russell Equity Income(EQIN) . These and a few others escaped ETF Deathwatch and could probably stand on their own. Russell decided to close them anyway. Why? The firm's artfully phrased press release offers a good clue:

"Recognizing the role that ETFs can play in an investment portfolio, Russell will continue to focus on offering solutions in the actively managed, asset-allocated ETF space as part of its core capability in investment strategy implementation as well as in the passive ETF space through its index licensing business. Russell remains the underlying index provider for many ETFs around the world, which have more than $80 billion in assets under management, and will continue its strong partnership with all of its ETF sponsor clients."

In the context of Russell's much larger index-provider business, even $300 million is a sideline endeavor at best. The Russell name was already attached to dozens of ETFs from other sponsors, such as iShares. By offering its own ETF suite, Russell put itself in competition with its own customers. The smaller fee percentage it makes as index provider is likely offset by the much bigger asset base.

Russell apparently intends to redesign its ETF offerings away from indexing and toward active management, where the conflict of interest is somewhat less problematic. More evidence: SEC filings that it will offer new ETFs similar to ONEF, including Russell Global Opportunity(ONEO) , Russell Bond(ONEB) and Russell Real Return(ONER) . When (or if) these will launch is not yet known.