Not every exchange traded fund (ETF) that comes to market will find a receptive audience. But how can you tell which are really headed for the chopping block, and which just need a little time?
About 49 ETFs called it quits in 2010, which is less than the 53 in 2009 and 58 in 2008. But it will always be a fact of ETF life that there will be closures.
Matt Hougan for Index Universe gives us some of the warning signs to help investors measure the risk of a fund closure. The list is based on Index Universe’s conversations with issuers:
- Assets: ETFs with more than $30 million in assets under management rarely close. They’re just too big to shut down.
- Volume and Spreads: ETF providers also consider volume and spread when gauging potential investor interest. Issuers know that funds that aren’t trading well will rarely catch on with investors.
- Competitive Landscape: ETF issuers consider their competition when deciding what to support in the market.
- Issuer Strength: How capable is the provider? Many small companies have axed their ETF lineup. Index Universe considers issuers with $1 billion or less in assets at risk of shutting down.
- Time Since Launch: New funds don’t normally close down, so even if a fund is small and trading poorly, issuers give it a little time to gain traction – generally six to nine months.
- Corporate Mergers: Companies that merge often rationalize their product line-ups.
Though closures can be disappointing for some investors, rest assured that you won’t wake up one morning to find your ETFs up and gone. The industry follows an orderly process of closing and liquidating funds, and there are no surprises. Read about the process here.
Tisha Guerrero contributed to this article.
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.