Unfortunately, not all ETFs are successful. By October 2020, almost 200 ETFs closed. Learn what happens to your money when an ETF closes, what you should do, and what to look for before you invest.
Why Does an ETF Close?
The main reason that an ETF closes is that the fund is not attracting enough assets from investors. The fund might have a very narrow focus, or it may not be performing well. Whatever the reason, without sufficient assets the fund doesn’t generate enough revenue for the sponsor. When an ETF closes, the process takes place under Securities and Exchange Commission (SEC) rules.
What Happens When the ETF Closes?
An ETF usually takes several steps before closing for good.
Public Notice of Closure and Liquidation
When sponsors decide to close an ETF, they file a prospectus supplement with the SEC. Sponsors usually announce the ETF closure in a press release and then notify investors 30 to 60 days in advance of the delisting day. The notice includes the final day of trading and information about what will happen to shares that don’t sell by the final day of trading. Here’s an example from Van Eck’s notice to shareholders when it closed three Vectors ETFs in April 2019: “The funds are expected to be delisted after market close on Friday, April 5, 2019. Shareholders who do not sell their shares of the funds before the market close on Friday, April 5, 2019 and continue to hold their shares through the liquidation date are expected to receive cash on or about Friday, April 12, 2019 in the cash portion of their brokerage accounts equal to the amount of the net asset value (NAV) of their shares.“
ETF Is Delisted and Liquidated
The next step in the process is delisting and liquidating the assets. Delisting means that the ETF can no longer be traded on the exchange. Sponsors normally liquidate ETFs shortly after they are delisted and investors receive the market value of the investments. For example, Van Eck sold the underlying investments and distributed the proceeds to the investors about a week after the Vectors ETFs were delisted.
Some ETFs Are Not Liquidated
A large fund sponsor may choose to merge an ETF into another offering instead of closing and liquidating. Merging an ETF has some unique challenges, however, because the shareholders have to approve the merger. Getting shareholder approval is potentially a long and expensive process. The second possibility is over-the-counter (OTC) trading, which isn’t ideal for an ETF closure. OTC securities are not as liquid, and the share price of the ETF can vary significantly from the value of the underlying investments. The good news is that this is rare—as of October 2020, The Balance only saw one ETF delisted and trading over the counter.
What You Should Do if Your ETF Closes
Usually, it’s best to sell your shares as soon as you get the notice. Before you sell, compare the share price to the published NAV, which is available from the sponsor. If the share price is below the NAV, consider waiting for liquidation when shares typically sell at market value.
How To Avoid ETF Closures
Do your research before you invest in an ETF to help prevent putting your money in one that might close soon after. Here are four criteria to consider:
