As the industry engineers new products, the exchange traded fund universe has been quickly expanding, with over 1,400 U.S.-listed funds on the market. However, the number of ETF closures is on the rise as well.
This isn’t necessarily a bad thing as some consolidation is to be expected in a maturing industry.
So far this year, 30 ETFs have closed down, reports Daniel D. Hickey for WealthManagement. For all of 2011, there were 30 fund closures, and the number rose to 94 for 2012. [Why ETF Closures are a Good Thing for Investors]
Nevertheless, the ETF industry evened out so far this year as 30 new funds have hit the market, according to IndexUniverse. [A Brave New World for ETFs as Success Rate Declines]
Among the larger fund providers, PowerShares closed 13 of its products and Guggenheim Investments shuttered nine. [Guggenheim Closing Nine ETFs]
Typically, ETF providers notify investors a couple weeks ahead of a closure, and the ETF would still operate as usual up to the close. As a fund closes, investors should use limit orders to exit the fund. However, if you hold onto the fund until it is liquidated, the investor will receive a full cash value equivalent to their exposure to the underlying holdings at the end price.
Potential investors should be aware that in rare cases a “termination fee,” which included legal fees and administration costs, could be tacked on if you hold on to an ETF until the bitter end.
According to an ETF Global “Watch List,” 59 funds that are less than 2 years old, have a minimum of $5 million under management and negative performance for the trailing 12-month period could raise their prospects for closure.
Moreover, there are other liquidity concerns in the fund industry. For instance, Deutsche Bank has suspended new creations on 26 exchange traded notes under the PowerShares DB brand. The suspension could create premiums or discounts to NAV.
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.