What to Do If an ETF in Your Portfolio Closes
The spread of ETFs over the past few years has resulted in record closings of low-cost funds as not all funds can attract enough investors to stay afloat, according to Associated Press correspondent Anne-Louise Jackson. In fact, AP reports that 132 ETFs stopped trading this year prior to September, up from 138 for all of 2017.
This usually only happens if you are buying “unique” ETFs, that is, not the ones that track the S&P 500 or other major index, according to Jackson. If this happens to you, here’s what to do.
You will receive a notification from the fund manager if one of your ETFs closes, indicating the dates when it will stop trading and when its assets will be liquidated. Then you will have two options: sell or wait for liquidation.
Selling is easy; you can trade stocks normally until the closing date of the fund, and you should try to sell the stocks before the last day you trade the fund. Another option, more risky, is to wait until the managers liquidate the fund. In this case, you can get away with a smaller amount than that which previously traded ETF, although ETF.com notes that “even if you fall asleep at the wheel, you will in most cases get the fair value of their shares.”
However, it is also possible, according to ETF.com, that the manager is not liquidated. “When ETFs are delisted without liquidating their portfolio, investors who cannot sell their shares before the last trading date will be forced to trade in the OTC market – a much less liquid, more cumbersome and generally more expensive process than trading on the exchange.”
Please be aware that tax consequences may arise after the sale or liquidation of your shares. If the ETF was in a taxable account, you may need to pay Capital Gains Tax on profits (short term if you held it for less than a year, long term if you held it for longer than that). “On the other hand, if you sell for less than you buy, your losses on that investment may offset the gains of others,” Jackson notes.
How to avoid closing ETFs
ETF.com says it is relatively easy to avoid investing in ETFs that are likely to close. Look for the following:
- Low Assets Under Management : “Low AUM is one of the best indicators of close risk.” Funds with a lot of money under management are too profitable to close. You don’t want to avoid all low AUM funds, but just keep in mind that the more assets you manage, the more likely that fund will stay.
- Issuer Strength : “Most ETF closings have historically been the result of entire companies exiting the ETF business, rather than large issuers simply closing ETFs that are slowly coming out of the gate.” Therefore, choose ETFs from issuers you trust and have a solid track record.
- Fund rating : If an ETF has the lowest AUM of 10 ETFs in the same segment, then it is more likely to close than a single ETF in a particular segment / country / etc. unpopular foundations offering unique opportunities. “
While ETF closings are becoming more commonplace, that doesn’t mean you have to worry about them every day. If you do receive a notice, sell your shares before the fund closes for the smoothest transition possible.