It’s not unusual for funds to close. After all, some ideas just don’t catch on with investors, and nobody expects a fund manager to spend her days minding the store on a tiny asset base forever.
Lately, however, we’ve seen a rash of stealth closures that leave me, frankly, a bit concerned.
The most recent stealth closure happened this morning, when the Sustainable North American Oil Sands ETF (SNDS) became the YieldShares High Income ETF (NYSEAarca:YYY).
I’m challenged to come up with the right verb in that preceding sentence. SNDS, metaphorically, went to bed an oil sands ETF and woke up this morning buying closed-end funds at deep discounts. It’s a Calvin-and-Hobbes-style transmogrification.
I don’t have any particular ax to grind about either version of the security that perhaps can now only be identified perfectly by its CUSIP (37950E481).
The old version was a thematic play in a narrow little corner of the energy market. The new version is trying to exploit the systematic mispricing of closed-end funds and roll it up into a more liquid wrapper. While neither cause is necessarily noble, exactly, they’re both perfectly reasonable strategies.
And I’ve got nothing but good wishes for the YieldShares folks. Christian Magoon, the chief executive officer of YieldShares, is an industry veteran, and a stand-up guy. The strategy is interesting and fills a niche. It’s certainly hitting a button—yield—that’s got a lot of focus right now.
But this kind of ticker repurposing gives me hives.
Here’s what the Bloomberg “DES” page for YYY looks like this morning.
Herein lies the problem. While anyone who actually read the press release—or perhaps our website— understands that this is essentially a fund that closed as SNDS, and now is a brand new fund that launched today as YYY, the vast majority of folks will just stumble across an ETF like YYY based on a headline or a chart someday. And what they’ll see is a fund that apparently has a world-beating strategy!
Look at that chart! YYY has beaten the pants off its own index! (Of course it hasn’t. That’s the chart of the old SNDS versus the new index for YYY.)
That’s to say nothing of the fact that the fund remains classified as an energy sector fund focused on North American large-cap stocks.
OK, OK. This will all get fixed eventually, and the charts will be fine.
But the opportunity for investor confusion is pretty big. Yes, SNDS sent out notes to all shareholders. Yes, they put out a press release. But there’s only so much the fund sponsor can control. After all, here’s how Bloomberg explains the switch:
And then there’s the issue of the accidental tourist. When we posted our original story on the change, the very first comment we received asked:“If I were to buy into SNDS, what will happen when the change to YYY is complete?”
While it’s true that there was very, very little money in the old SNDS last night, there were still 50,000 shares outstanding, and somebody owned them. Presumably, last night they thought they were holding a basket of U.S. and Canadian oil stocks, and this morning, they own a collection of closed-end funds.
While that might seem like a crazy trade, it could theoretically be better than the alternative—just shutting down SNDS.
The way the transition actually worked is that SNDS did a custom two-way creation/redemption with a willing authorized participant. They dumped out the old stocks, and got the new CEFs in-kind, in an entirely nontaxable transaction. The alternative—dumping the stocks and sending everyone a check— would certainly have had some tax implications.
So in that sense, sure, it’s—I guess, if I squint—better for investors. It’s definitely better for the fund issuer, who gets to launch a new fund without all the expense of actually launching a new fund. Instead, they just flip a switch and presto, whammo, there’s that new-fund smell. Hopefully nobody gets hurt.
At the time this article was written, the author held no positions in the securities mentioned. Contact Dave Nadig at firstname.lastname@example.org.
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