With the markets swinging as wildly as they are, investors may pull enough assets out of an exchange traded fund and potentially force fund providers to close less desirable funds.
“Sudden and large investor withdrawals triggered by market events or counterparty risk concerns can also lead to funding liquidity risk,” according to the Bank of International Settlements, reports John Wasik for Reuters.
The number of ETFs that are being shut down or liquidated, while previously a rare occurrence, has skyrocketed over the last couple of years. Closings are up 500% in each of the last three years since 2007, or about one a week.
In 2007 there were no exchange traded product closings, but in 2008, 59 funds closed; in 2009, 56 funds closed; and in 2010, 49 funds closed, according to IndexUniverse.
Van Eck Global and Bank of America (NYSE: BAC) subsidiary Merrill Lynch have reached a deal in which Van Eck plans to offer investors in six HOLDRS the chance to swap for shares of new exchange traded funds. The remaining HOLDRs will be shut down. [HOLDRS Deal]
When a fund does close, investors will be notified and given 30 days to sell their shares, or they will have to receive whatever is left over from market proceeds at the time of closure.
For more information on ETFs, visit our ETF 101 category.
Max Chen 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.