Recently, a reader wrote in to ask us what happens when an exchange traded fund (ETF) you happen to own is closing. In the wake of a few closings this year, it’s a great question.

We caught up with Claymore President Christian Magoon, who told us about the process they took when 11 of their ETFs closed earlier this year.

Once it is announced that an ETF will close, there is a period of time (3-4 weeks) that it is still traded. This is currently the case with the Ameristock Treasury bond ETFs, which will cease trading today.

In this time period, investors can buy or sell shares as they normally would. On the day that the ETF closes, all trading stops. The provider then has a period of time (about 2 weeks) to sell the underlying securities within the ETF. 

The proceeds are then distributed to the owner of record. The owner will get the value of the securities from when they were sold, not when the ETF stopped trading. So, if you’re holding the ETF when it closes, you’re running the risk that the underlying securities could go down (or up) in value in that time frame.

If you want to know the value you are getting from your ETF, it might be better to sell the shares before the ETF stops trading. Otherwise, you’re left cooling your heels and won’t know what you’re going to get until the securities are sold and proceeds are distributed. It’s up to your risk tolerance.

But the closing of an ETF is an orderly process, and investors are given plenty of warning so they can plan accordingly.