What Happens When An ETF Shuts Down?

By: Pete
Date posted: 12.15.2012 (8:07 pm) | Write a Comment  (0 Comments)

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I generally tend to invest in very liquid ETF’s with significant AUM’s. Those ETF’s do not close because they are profitable for the issuers. In the rare cases where they are not, the fees might be increased a bit (I have not seen an example of this). So for the vast majority of ETF’s, especially the ones that I personally recommend, this is not something that would happen.

That being said, some ETF’s do end up closing, especially in the past few months. Why? The biggest reason is that a big part of an ETF’s success is “first to market”. ETF’s like SPY and EEM are not the cheapest (the best) but they were there first, have tremendous names and liquidity. Knowing that, ETF issuers tend to launch dozens of ETF’s as experiments. They will try them out, see how well they do and can close them down if those end up not working. Some issuers resist the idea but others see it as part of the business.

When An ETF Closes

The issuer will do a few things.

-It will send out a press release announcing the closing
-It will advise all shareholders of the closing date (generally several weeks later)

Between the moment the shareholder finds out about the closing and when it actually occurs, shareholders will have 2 choices:

-sell those units in the market: this can work well but it’s better to be careful. Why? Because once a fund announces it is closing, the market makers might not be able or willing to offer fair markets. If the spread remains small, chances are that you are good to go

-wait until it closes: Once a fund closes, the issuer will buy back the units from you at the actual value or NAV (net asset value) so a few days later you will receive the money.

One thing to pay attention to: In some rare instances, issuers will decide to merge a closing fund into another more successful ETF. That would perhaps be a good alternative but you’ll have to verify the new ETF (description, index, fees, etc)

In The End

It’s not the end of the world by any means if an ETF that you own ends up closing. That being said, it’s still a good idea to make sure you know what’s going on when you get such a notice to avoid bad surprises.

Has this ever happened to you?


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