What Happens if an ETF Closes? - NerdWallet (2024)

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The past decade has seen an explosion in new exchange-traded funds. Investors have flocked to ETFs because they trade like individual stocks, but offer the diversification benefits of mutual funds — all at a low cost.

But once a fund opens it doesn't necessarily stay open forever. Fund closures can create a costly hassle for investors. Here’s what to do if you face an ETF closure — and how to avoid one in the future.

Why are ETFs closing?

The industry’s rapid growth has resulted in some funds that proved to be too niche and failed to attract investors. In 2020, 182 ETFs closed. That being said, there were still 8,552 ETFs in 2021.

If you stick with the largest ETFs that track broad market gauges (like the S&P 500) or major asset classes (like bonds), you may never encounter a fund closure. But, if you get more creative when shopping for ETFs, you could get burned.

How ETF closures work

If the company overseeing an ETF in your portfolio decides to close it, you’re a soon-to-be former shareholder. Perhaps the fund is liquidating because it didn’t generate investor interest or attract sufficient assets to cover administrative costs; regardless, the manager no longer sees a viable business case for the ETF.

The ETF provider will generally announce the fund’s closure by sending notice to shareholders, listing dates when it will stop trading and when its assets will be liquidated.

You have two options:

  • Sell. Until the ETF stops trading, you can sell shares like normal. The fund will continue to track its underlying index, which helps ensure its price won’t plummet to zero just because of the closure announcement. While you may wish to execute a limit order specifying a minimum selling price, there’s a finite window to execute the trade, so you may not get your desired price.

  • Await liquidation. You can also simply wait for the fund to be liquidated after its final trading day. The managers will sell all holdings in the fund, settle other obligations and divvy up the balance among remaining shareholders. The price per share from liquidation could differ from the fund’s last trading price, so be aware of this risk.

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Unexpected taxes

The biggest hassle of an ETF closure is it upends your investment timeline, and there’s nothing you can do about it. You’re forced to sell or take liquidation proceeds, which can create a tax burden or lock in investment losses.

You may incur a capital gains tax on profits if the ETF’s in a taxable account, that is, a non-retirement account. If you owned the fund less than a year, the profit will be taxed at your normal tax rate. If you owned it for longer than a year, you’ll pay a lower long-term capital gains rate. On the other hand, if you sell for less than you bought, your loss on this investment can offset gains on others. Ask your tax preparer or a financial advisor for advice.

»MORE: How to pick your next investment

How to avoid an ETF closure

You have plenty of options for ETFs that have very little risk of closing among the top 100 largest ETFs.

These funds have a proven track record, encompassing options that track broad market gauges, different geographies, specific industries or even other assets, like bonds. Among them, assets under management range from $259 billion to $7 billion, with average trading volumes ranging from 70 million-plus shares a day to less than 100,000.

Looking at an ETF that’s not on that list of the top ones? Pay attention to:

  • Total assets, the amount of money the ETF has attracted in investment.

  • Average volume, the average number of shares that trade each day.

  • Inception date, the date this ETF began trading.

  • ETF provider, the company name associated with the fund.

While there’s no way to predict which funds will close, when researching an ETF on an online broker, look for red flags, including ETFs that:

  • Haven’t attracted much money in assets.

  • Have low average trading volume.

  • Haven’t gained much traction in the time they’ve been trading.

  • Are from providers that don’t oversee many other funds.

Compare ETFs that compete with one you’re considering to answer these questions.

»MORE: The best brokers for ETF investors

What Happens if an ETF Closes? - NerdWallet (2024)

FAQs

What Happens if an ETF Closes? - NerdWallet? ›

The ETF provider will generally announce the fund's closure by sending notice to shareholders, listing dates when it will stop trading and when its assets will be liquidated. You have two options: Sell. Until the ETF stops trading, you can sell shares like normal.

What happens to my money if an ETF closes? ›

Liquidation of ETFs is strictly regulated; when an ETF closes, any remaining shareholders will receive a payout based on what they had invested in the ETF. Receiving an ETF payout can be a taxable event.

Can an ETF be closed ended? ›

ETFs are open-ended funds, meaning they can constantly take on new investors and as they do, the fund's assets grow. CEFs have a fixed number of shares that are offered through an IPO. After that, no new shares will be issued and the fund is "closed."

Has an ETF ever gone to zero? ›

Leveraged ETF prices tend to decay over time, and triple leverage will tend to decay at a faster rate than 2x leverage. As a result, they can tend toward zero.

What happens when an ETF is suspended? ›

An ETF shutting down is not the end of the world. The fund is liquidated and shareholders are paid in cash. It's not fun, though. Often, the ETF will realize capital gains during the liquidation process, which it will pay out to the shareholders of record and that could mean an unnecessary tax burden.

Why is ETF not a good investment? ›

There are many ways an ETF can stray from its intended index. That tracking error can be a cost to investors. Indexes do not hold cash but ETFs do, so a certain amount of tracking error in an ETF is expected. Fund managers generally hold some cash in a fund to pay administrative expenses and management fees.

What happens to my ETF if Vanguard fails? ›

The securities that underlie the funds are held by a custodian, not by Vanguard. Vanguard is paid by the funds to provide administration and other services. If Vanguard ever did go bankrupt, the funds would not be affected and would simply hire another firm to provide these services.

What is the single biggest ETF risk? ›

The single biggest risk in ETFs is market risk.

Can you cash out ETFs? ›

ETF trading generally occurs in-kind, meaning they are not redeemed for cash. Mutual fund shares can be redeemed for money at the fund's net asset value for that day.

Are ETFs traded once a day after the market closes? ›

Exchange-traded funds do not trade like traditional mutual funds, which you can only buy or sell once per day after the markets close. ETF prices fluctuate continuously throughout the day like stocks.

Can an ETF lose all its value? ›

"Leveraged and inverse funds generally aren't meant to be held for longer than a day, and some types of leveraged and inverse ETFs tend to lose the majority of their value over time," Emily says.

Can you lose your investment in ETF? ›

Portfolio Risks

4 If you buy into a leveraged ETF you are amplifying how much you can lose if the investment crashes. 1 You can also easily mess up your asset allocation with each additional trade that you make, thus increasing your overall market risk.

Is an ETF safer than a stock? ›

Because of their wide array of holdings, ETFs provide the benefits of diversification, including lower risk and less volatility, which often makes a fund safer to own than an individual stock. An ETF's return depends on what it's invested in. An ETF's return is the weighted average of all its holdings.

What happens to ETFs during a recession? ›

Investors looking to weather a recession can use exchange-traded funds (ETFs) as one way to reduce risk through diversification. ETFs that specialize in consumer staples and non-cyclicals outperformed the broader market during the Great Recession and are likely to persevere in future downturns.

Do I lose my money if a stock is suspended? ›

If the suspended company complies with all regulations, the exchange might revoke the suspension, and the shares will start trading again. If the company gets suspended and eventually closes, shareholders will have to write it off as a loss.

Is it OK to hold ETF long term? ›

Nearly all leveraged ETFs come with a prominent warning in their prospectus: they are not designed for long-term holding. The combination of leverage, market volatility, and an unfavorable sequence of returns can lead to disastrous outcomes.

What happens if an ETF provider goes bust? ›

As with traditional investment funds, ETFs have to place their underlying investments with a custodian. The fund provider cannot be both the fund manager, and the "guardian" of the assets. So if an ETF provider goes bankrupt, your investments are not gone cause they will still be kept by the custodian.

Are all ETFs closed-end funds? ›

Structure: Unlike closed-end funds, most ETFs are structured as open-end funds and some ETFs are structured as UITs.

How long does it take to get money out of ETF? ›

Once trade settlement is complete, funds will typically arrive in your Cash Account or external bank account in 1-2 business days. It may take longer if, for example, you recently made a deposit or if you are withdrawing to a different bank account than the one used for initial funding.

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