The past decade has seen an explosion in new exchange-traded funds (ETF). 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 not all funds attract investors, and ETFs are dying off at a near-record rate this year. 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 resulted in some funds that proved to be too niche and failed to attract investors. Through September, 132 ETFs have permanently stopped trading this year, only six fewer than the record of 138 in 2017, according to data from ETF.com. Even so, the number of new funds launched year-to-date, 189, still outpaces closures.
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 are 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 generally will 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: