Nothing lasts forever, not even ETFs. Fund closures are a fact of life. Some ETF sponsors keep their product lineups healthy by regularly pruning the weaker offerings. Others stubbornly ignore the warning signs, and by waiting too long to make adjustments, often find themselves forced to close up shop completely.
Explosive industry growth means more closures are inevitable. Here are five vital guidelines to remember if one of your ETFs heads for the exit.
- Watch your step. The ETF liquidation process can be messy. One sponsor, MacroShares, charged all of its shareholders a huge termination fee. Another sponsor, Credit Suisse, delisted three products but never liquidated them, forcing shareholders to find buyers in the over-the-counter market before they could recover their cash.
- Don’t hold on until the end. Sponsors may tell you, correctly, that liquidation will allow you to avoid a transaction fee. Even so, you are probably better off selling on your own terms – and as quickly as possible. A $10 or even $30 transaction fee isn’t worth risking what may happen if you hold through the liquidation process.
- Sell your shares before your ETF is delisted. You may still be able to get out with an over-the-counter trade in the interim period between delisting and liquidation, but you will probably get a price significantly lower than the fund’s net asset value (“NAV”).
- Be very dubious of quote data when you sell and always use a limit order. Trading will likely be thin, and the bid/ask spread wide. Check the ETF’s NAV ticker symbol (its actual value, which is different from the market price) and set your limit price a few cents lower.
- Keep your portfolio strategy unchanged by minimizing the interruption. The best way: Decide on an alternative ETF before you exit the one that is closing and astutely settle on an entry price with your sale proceeds. The ETF Field Guide is a perfect reference for deciding on the best option in the same category.
Of course, if you’re avoiding names on the ETF Deathwatch list, then your chance of facing these problems will be greatly reduced. The tips above will help you make the best of a bad situation.
Disclosure covering writer, editor, and publisher: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.
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