Are you worried about that exchange traded fund (ETF) you’re holding could be gearing up to close down? Check out these signs to see if there’s cause for concern or if you’re just being paranoid.
First things first: If your ETF is going to close down, you will not lose all of your money. You also won’t wake up one day to find the fund dead and buried with no warning. Providers make an announcement of closure well before it actually happens to give investors time to act accordingly.
Matt Hougan for Index Universe explains that after closure, a fund will simply liquidate its securities and pay the cash proceeds to investors. All things being equal, investors will receive the full net asset value (NAV) of the fund, or something close to it.
When an ETF you own shuts down, simply reallocate your cash and be aware of any tax issues involved. (Other tips in what to do if your ETF closes up shop).
- Size Matters: Fund companies are unlikely to shut down successful funds, so looking at a product’s assets under management is an obvious step toward evaluating fund closure risk. Size also matters for the ETF provider.
- Time on the market: The average fund that is liquidated has been on the market a bit more than a year. Investors can give a fund a grace period of at least six months to attract some interest in the market before concern is warranted.
- Liquidity: Funds with trading interest or high trading volume are good signs, because this could ultimately translate into greater assets under management. You can examine various cutoff points for an ETF, including average spreads, but a common one is 5,000 shares per day. Funds trading fewer than 5,000 shares per day are at increased risk of closure.
- Regulatory Risk: The Commodity Futures Trading Commission (CFTC) has been examining futures-linked commodity products. The regulatory body could limit the positions these funds can date. As a result of these limits, some funds may opt to close. (What regulations will mean).
- Performance: Funds delivering high returns and that are attracting investor interest are simply not going to shut down.
Remember that an ETF closing is not a bad thing, and it is part of the evolutionary process of the ETF industry. Not every product can be a hit. This simply ensures that investors are getting the best possible product in the end. (More reasons that ETF closings are not cause for panic).
For more stories about ETF closings, visit our ETF 101 category.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.