PIMCO is shuttering three of its exchange traded funds, including two that track U.S. Treasuries and one that follows a foreign currency strategy.
According to PIMCO, the PIMCO 3-7 Year U.S. Treasury Index Exchange-Traded Fund (NYSEArca: FIVZ), PIMCO 7-15 Year U.S. Treasury Index Fund (NYSEArca: TENZ) and PIMCO Foreign Currency Strategy ETF (NYSEArca: FORX) are on the chopping block.
FIVZ has $9.3 million in assets under management and was launched in 2009. TENZ has $20.3 million in AUM and was launched in 2009. FORX has $14.3 million in AUM and was launched in 2013.
FIVZ tries to track Treasury bonds around the 5-year bellwether, with an effective duration of 4.43 years, TENZ focused on more mid-term maturities, with an effective duration of 7.87 years.
FORX aims to provide exposure to foreign currencies, and according to PIMCO, the fund “is likely to benefit if the U.S. dollar depreciates.” However, the USD is currently in a strengthening cycle and will likely continue to appreciate as foreign central banks implement loose monetary policies and the Federal Reserve thinks about hiking rates.
The liquidation of the three funds will be on September 30, 2015. The last day of trading on NYSE Arca for each liquidating fund is expected to be September 23, 2015, so the three funds will not be able to accept orders for purchase of creation units and there will be no guarantee that investors will find a market for purchase or sale of fund shares after the 23rd.
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. [New ETFs: Too Much too Soon?]
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.
Alternatively, an investor can hold the ETF until the closure date. The termination date is typically set within four to six weeks after the closing announcement. Once the ETF shuts down, shares will be redeemed on that day’s closing NAV, and cash is then deposited into investors’ accounts.
In some 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. According to PIMCO, FIVZ, TENZ and FORX investor shares will automatically redeemed as of the close of business on the liquidation date without the imposition of redemption transaction fees. However, the investors will have to deal with the tax consequences of the sale. [Steps To Take When Your ETF Is About To Close]
Nevertheless, PIMCO still offers a number of Treasury bond-related ETFs, including the short-term PIMCO 1-3 Year U.S. Treasury Index Fund (NYSEArca: TUZ) and long-term PIMCO 25+ Year Zero Coupon US Treasury (NYSEArca: ZROZ).
For more information on the ETF industry, visit our current affairs category.
Max Chen contributed to this article.