Since the 🦩first exchange-traded fund (ETF) began trading in thღe U.S. in 1993, ETFs have become one of the most popular investment vehicles available to individual investors. However, sometimes, ETFs experience funding problems, offer low profits, or lose investor interest. When this happens, they may have to liquidate or close the fund.

Exchange-traded funds create securities baskets that track equities and trade on the market like normal stocks. As of May 2024 (latest information), there were about 12,000 ETFs listed globally. In 2024, about 622 ETFs closed globally. Read on to learn what happens when an ETF shuts down.

Reasons for ETF Liquidation

T🦩he top reasons for clos༒ing an ETF are a lack of investor interest and a limited amount of assets.

For exampꦐle, investors may avoid an ETF because it is too narrowly-focused, too complex, too costly, or has a poor return on investment. They may prefer a broader market-tracking ETF with solid year-to-year returns from a well-known investment company.

And when ETFs with dwindling assets are no longer profitable, the investment company may decide to close out the fund. Generally speaking, ETFs tend to have low profit margins and therefore need sizeable amounts of assets under management (AUM) to make money.

Although ETFs are generally considered lower risk than individual securities, they are not immune to problems such as 澳洲幸运5官方开奖结果体彩网:tracking errors and the chance that certain indexeꦺs may slow other market segments or active managersജ.

The Liquidation Process

ETFs that close down must follow a strict and orderly liquidation procedure. The liquidation of an ETF is similar to that of an investment company, except that the fund also notifies the exchange on which it trades thaღt trading will cease.

Notification

Shareholders typically receive notification of the liquidation between a week and a month before it occurs, depending on the circumstances. The board of directors, or trustees of the ETF, will confirm that each share is individually redeemable upon liquidation since they are not redeemable while the ETF is still operating. They are redeemable in 澳洲幸运5官方开奖结果体彩网:creation units.

Redeeming Shares

Investors who want out of their investment upon notice of an ETF's impending liquidation can sell their shares on the open market. A 澳洲幸运5官方开奖结果体彩网:market maker buys the shares, and they are redeemed.

Those shareholders who don't close their position in the ETF while it is still traded will receive their money, most likely in the form of a check. The amount of a liquidation distribution is based on the number of shares an investor held and the 澳洲幸运5官方开奖结果体彩网:net asset value (NAV) of the ETF.

Tax Consequences

The liquidation can create a tax event if an ETF is held in a taxable account. So investors may owe 澳洲幸运5官方开奖结果体彩网:capital gains taxes on any profits received when their shares ar𝄹e redeemed.

4 Ways To Identify an ETF on the Way Out

It i🤡s possible to reduce your chances of owning an ETF that may close and th🦂en having to search for another place to stash your cash.

The following four tips can help investors determine whether an ETF is likely to face some t🌼rouble:

1. Be alert to ETFs that track narrow 澳洲幸运5官方开奖结果体彩网:market segments. These p♊roducts are considered risky and therefore r🍃equire careful evaluation.

2. Examine an ETF's trading volume. Volume is a good indicator of liquidity and investor interest. If the volume is high and the price is rising, the ETF most likely is liquid, and people want to own it. That can be a good sign of ETF vitality.

3. Look at the AUM to determine how much money fund managers have to work with to achieve returns that please investors. High and growing levels of AUM can point to a fund's success and its ability to attract greater numbers of investors.

4. Review an ETF's prospectus to understand what type of investment you are holding. Typically available upon request, the prospectus will provide information about fees and expenses, investment objectives, investment strategies, risks, performance, pricing, and other information.

How Will I Use This in Real Life?

If you're investing in an ETF, it's important to track its size, especially if it's a niche fund rather than a broad-based, established one, like the SPDR S&P 500 ETF. A lack of investor interest, reflected in low asset inflows, can lead to a fund shutting down.

While ETF closures don't spell financial doom, you can sell your shares ahead of time or receive a final payout if your fund is closing. The latter may come with tax implications unless you're holding it in a tax-advantaged account, so be prepared for that.

This is why it's good to check in on your ETF fairly often, not just on its performance, but also on how much money is flowing into the fund. If it closes, plan for how you want to manage the distribution.

The Bottom Line

In the U.S., ETFs have been around since the early 1990s. They provide investors with an array of attractive features—instant diversification, low costs, the flexibility of intraday trading, and more. Yet, even while new ETFs may be launched, others may shut d꧋own.

If you find yourself holding an ETF that is being closed, there's no reason to panic. You'll get your money back and can search for another ETF in which to invest.