While many exchange traded funds have been a hit with investors, some strategies have experienced lackluster growth, which has prompted issuers to close the funds. If you are holding onto an ETF that is set to close, you don’t need to worry.
Investors “should not panic if an ETF announces a closure,” writes AdvisorShares CEO Noah Hamman. “Historically, the process to close ETFs has operated very smoothly.”
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.
If you opted to sell the position right away, an investor should check the indicative net asset value of the ETF- anyone can check the iNAV value on Yahoo! Finance by searching for ^TICKER-IV. By comparing the iNAV to the price of ETF, an investor gets a better sense of how the ETF is trading relative to its net asset value. If the two prices are close, a limit order should be used.
However, if you are executing a large block trade, Hamman suggests calling the ETF sponsor to find out the best price that they can find for the order.
Alternatively, an investor can hold the ETF until the closure date. The termination date is typically set within four to six weeks of 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 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 ETFs, visit our ETF 101 category.
Max Chen contributed to this article.