ETF Closures: What Investors Need to Know🔚

In partnership with

Our ETF101 series arrives! Today, we’ll discuss an often-overlooked but crucial topic for ETFs: ETF closures.

In 2024, around 200 ETFs closed, similar to the average annual closures in recent years. While new ETF launches grab attention, closures happen quietly. Understanding this process is as important as choosing a new ETF.

Today’s Fastest Growing Company Might Surprise You

🚨 No, it's not the publicly traded tech giant you might expect… Meet $MODE, the disruptor turning phones into potential income generators.

Mode saw 32,481% revenue growth, ranking them the #1 software company on Deloitte’s 2023 fastest-growing companies list.

📲 They’re pioneering "Privatized Universal Basic Income" powered by technology — not government, and their EarnPhone, has already helped consumers earn over $325M!

Their pre-IPO offering is live at just $0.26/share – don’t miss it.

Invest Now

*Mode Mobile recently received their ticker reservation with Nasdaq ($MODE), indicating an intent to IPO in the next 24 months. An intent to IPO is no guarantee that an actual IPO will occur.
*The Deloitte rankings are based on submitted applications and public company database research, with winners selected based on their fiscal-year revenue growth percentage over a three-year period.
*Please read the offering circular and related risks at invest.modemobile.com.

Why Do ETFs Close?🤔

ETFs don't close on a whim. There are several key reasons why fund providers pull the plug:

1. ⤵️Insufficient Assets Under Management (AUM): ETF closures commonly occur due to simple economics. ETFs need a certain level of assets to be profitable for their issuers. Many industry experts consider $50-100 million the minimum viable size, though this varies by provider and strategy.

2. 🙂‍↔️Lack of Investor Interest: What seemed like a brilliant ETF concept sometimes doesn't resonate with investors. This could be because:

   • The investment strategy is too complex

   • The timing wasn't right (like launching a tech-heavy ETF right before a tech downturn).

   • Similar products from more established providers already dominate the space

   • The fund's focus area has fallen out of favour

3. 🔧Strategic Shifts by the Provider: ETF issuers regularly review their product line-ups. A provider might close ETFs to eliminate overlapping products, shift focus to more profitable investment strategies and reposition their brand in the marketplace.

4. 📉Poor Performance: While underperformance alone rarely causes closure, it certainly contributes. Poor returns make it harder to attract new investors, keeping assets low and creating a downward spiral.

How can you, as an investor, identify ETFs heading toward closure? Here are the warning signs to watch for:

• 🚩Low and Stagnant AUM: An ETF with under $50 million in assets and no meaningful growth in the past 1-2 years is at higher risk, particularly if issued by smaller companies that may be less patient with underperformers.

• 🚩Declining Trading Volume: A drop in daily trading volume often signals reduced interest from institutional investors and market makers. Low liquidity can widen bid-ask spreads, making the ETF less attractive to new investors and speeding up its decline.

• 🚩High Expense Ratio Relative to Competitors: An ETF with a higher expense ratio than similar funds, without unique benefits, may struggle to attract assets. In today's competitive market, expense ratios are crucial.

• 🚩Fund Company Consolidation: When ETF providers merge or are acquired, they often close duplicate or underperforming funds.

• 🚩Consistent Underperformance: One poor year is seldom critical, but continued underperformance against benchmarks and peers is a major red flag.

⏳What Happens When an ETF Closes?

Let's say you own shares in an ETF that's announced its closure. What can you expect? Here's the typical timeline and process:

1. Announcement Date: The fund company announces the closure, typically giving 2-4 weeks' notice. This information appears in a press release, on the provider's website, and in communications to shareholders.

2. Last Day of Trading: This is the final day you can buy or sell shares of the ETF on the exchange. After this date, the ETF no longer trades on the open market.

3. Liquidation Date: The fund manager sells all remaining holdings and distributes the cash to the remaining shareholders. This typically occurs 1-7 days after the last trading day.

Once an ETF closure is announced, the process is essentially irreversible. As an investor, you cannot vote to keep the fund open or petition the provider to change course. The decision rests entirely with the fund company. While you can't prevent an ETF from closing, you can take proactive steps to protect your interests:

1. Take Action Earlier: Once you identify the red flags, evaluate whether the investment still fits your portfolio. Consider exiting positions in at-risk ETFs before the closure announcement.

2. When Closure Is Announced: If you own an ETF that announces it's closing:

   • Sell on the exchange: Instead of waiting for liquidation, sell your shares on the open market to control timing and avoid tax issues.

   • Plan your reinvestment: Identify suitable replacement funds before closing to maintain your desired exposure without cash drag.

3. Tax Planning: If a closure triggers significant capital gains, consider whether you have losses elsewhere in your portfolio that could offset these gains and consult a tax professional about strategies to minimise the impact.

4. Learn From the Experience: Assess what red flags you might have missed and consider whether you adequately diversify your ETF providers.

🧭Navigating the ETF Lifecycle

While disruptive, ETF closures are a natural part of the ETF ecosystem. They help keep the industry healthy by removing underperforming or redundant products. Understanding the closure process transforms investors from a potential crisis into a manageable event.

Review your ETF holdings to check: Are any ETF investments showing closure red flags? Do you have appropriate alternatives identified? A little preparation can save significant headaches down the road.

We hope you've enjoyed this weekend's edition of our ETF101 series. At ETF UNO, we're committed to equipping you with practical knowledge to navigate the evolving ETF landscape. Join our community for valuable insights, timely updates, and exclusive content to help you become a more confident ETF investor.

DISCLAIMER: This article is for informational purposes only and does not constitute investment advice. Always conduct your own research and consider consulting with a financial advisor before making investment decisions.