Zombie ETFs: What Australian Investors Should Know in 2025

Australia’s exchange-traded fund (ETF) market has exploded over the past decade, but not every fund is a blockbuster. In 2025, the term “zombie ETF” is popping up with increasing frequency—raising questions for investors who want their portfolios to stay alive and kicking.

What Are Zombie ETFs?

A “zombie ETF” is a fund that continues to exist despite very low trading volumes, limited assets under management (AUM), and little investor interest. Unlike blockbuster ETFs that attract billions and offer tight trading spreads, zombie ETFs limp along, often with AUM below $10 million and daily trading volumes so thin that investors can’t easily buy or sell without moving the price.

These funds aren’t dead, but they’re not exactly thriving. They typically:

• Have failed to attract new money since launch
• Trade with wide bid-ask spreads, adding costs for investors
• Are at risk of closure or consolidation by their issuer

In Australia, the ETF market hit a record $180 billion in assets in early 2025, according to ASX data, but more than 15% of listed ETFs are now considered “zombies”—a figure that has quietly crept up as fund providers launch niche, sector-specific, or thematic ETFs that struggle to find an audience.

Why Are Zombie ETFs a Problem?

For most investors, liquidity and scale matter. Here’s why zombie ETFs can be risky:

• Trading Costs: Thin trading leads to wide bid-ask spreads, meaning you’ll pay more to enter or exit your position.
• Potential Closures: Providers may close or merge underperforming ETFs. While you’ll typically get your money back at NAV, you might be forced to sell at an inconvenient time, potentially triggering unwanted tax events.
• Tracking Error: Smaller funds may struggle to accurately track their index, especially if they’re holding illiquid or hard-to-price assets.

In 2024, several Australian ETF issuers, including BetaShares and VanEck, announced closures of underperforming funds, citing insufficient scale and investor interest. This trend is expected to continue in 2025 as new launches crowd the market and investors become more discerning.

How to Spot a Zombie ETF in 2025

Before you buy, do a quick health check on any ETF you’re considering. Here’s what to look for:

• Assets Under Management (AUM): Be wary of funds with less than $10 million in AUM. Larger funds are more likely to survive and trade efficiently.
• Trading Volume: Check average daily volume on the ASX. Low turnover means wider spreads and potential difficulty exiting your position.
• Issuer Commitment: Look for ETFs from established providers with a track record of supporting their products. New or niche entrants may lack the resources to keep struggling funds afloat.
• Fee Creep: Some zombie ETFs quietly raise fees to cover costs, eroding your returns even further.

For example, in early 2025, the ASX-listed “Future Tech Small Cap ETF” saw its AUM stagnate below $7 million and daily trading volume drop below 1,000 units, despite aggressive marketing. Its management fee increased by 0.10% in March, signaling struggles behind the scenes.

What Can Investors Do?

Zombie ETFs aren’t always destined for closure—some may revive if their sector comes into favour or if market conditions change. But for most investors, it’s wise to:

• Stick with larger, liquid ETFs for core exposures to Australian shares, global markets, or bonds.
• Diversify: Don’t let any single niche or thematic ETF make up more than a small portion of your portfolio.
• Monitor fund health: Review your ETF holdings annually for liquidity, AUM, and any fee changes or issuer announcements.
• Be alert to closure notices: ETF providers are required to notify holders ahead of any closure, but staying informed gives you more flexibility in managing exits and tax outcomes.

The 2025 Outlook: Will Zombie ETFs Keep Rising?

The Australian ETF landscape is likely to see more closures and consolidations in 2025 as providers refocus on scale and investor demand. Regulatory pressures from ASIC around product suitability and investor protection are also pushing issuers to be more selective with new launches. For retail investors, the best defence is vigilance—choose liquid, established ETFs, keep an eye on the health of your holdings, and don’t chase every new niche trend that hits the market.