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My ETF is Shutting Down — Now What?

tlydon@globaltrend.com (Tom Lydon)

The ETF industry continues to grow in terms of assets but not every product or firm is a success. It’s a very competitive business and some funds are forced to liquidate for lack of interest while entire ETF companies can also fold.

Recently, FocusShares , a subsidiary of Scottrade, threw in the towel after failing to attract enough assets. This brings the ETF closure count up to 34 so far this year. [Scottrade to Close FocusShares ETFs]

Russell Investments is also conducting a “strategic review” of its U.S. ETF team, cutting about 30 jobs in the ETF unit. [Russell Reviewing ETF Unit, Cutting Jobs]

Moreover, Direxion also announced that it will close nine of its 3x leveraged products on Sept. 12 due to an “inability to attract sufficient investment assets,” reports the ETF Professor for Benzinga.

In the event a firm shutters an ETF, investors have one of two choices: sell your position before the final trading date, or wait for the fund to close and the check to come in. This can create tax consequences, and no investor likes surprises.

Investors should note that in the last days of the ETF, sellers will be scrambling to dump their positions, which can lead to hefty losses. Due to the disparate number of sellers to buyers, the bid/ask spread tend to widen. Potential sellers should try to set up limit orders to sell at a given price so that one won’t get caught unawares.

In rare cases, investors who opt to hold until the fund is liquidated may also be billed for the costs of closing, or “termination fee,” which includes legal fees and administrative costs – ETFs may raise the expense ratio retroactively.

According to the ETF Industry Association, there was 1,486 ETF and exchange traded note products available, with $1.2 trillion in assets under management, as of the end of July.

“But for those concerned about ETF closures, perhaps there is an equally important criterion that should be considered, namely, which fund company sponsors the ETF in question,” Ryan Issakainen, Senior V.P. and ETF Strategist at First Trust Advisors, previously stated. [Why ‘Zombie’ ETFs are Still Kicking‏]

If funds do not gather enough assets, fund providers may not find it profitable to keep the ETF. However, larger companies with deeper pockets may patiently wait it out until a fund becomes popular enough to generate sustainable profits.

For more information on ETFs, visit our ETF 101 category.

Max Chen contributed to this article.