Additionally, closures provide a natural weeding-out process, which has helped increase price competition and signal to providers the level of saturation in a given investment area.
Investors shouldn’t be scared off by ETF closures. In the event a firm shutters an ETF, investors have one of two choices: sell your position before the final trading date, or wait for the fund to close and the check to come in. This can create tax consequences, and no investor likes surprises.
Investors should note that over an ETF’s last few days of trading, sellers will be scrambling to dump their positions, which can lead to hefty losses. Due to the disparate number of sellers to buyers, the bid/ask spread tend to widen. Potential sellers should try to set up limit orders to sell at a given price so that one won’t get caught unawares.
In rare cases, those who opt to hold until the fund is liquidated may also be billed for the costs of closing, or “termination fee,” which includes legal fees and administrative costs – ETFs may raise the expense ratio retroactively.
For more information on the ETF industry, visit our current affairs category.
Max Chen contributed to this article.