When ETFs Shut Down

5/15/2017


Even as investors flock to exchange-traded funds (ETFs) and exchange-traded notes (ETNs), more of them are closing their doors.

Last year, a record 128 ETFs and ETNs were shuttered, up from 101 in 2015. Roughly one-quarter of the more than 2,700 ETFs and ETNs ever launched no longer trade. Closings largely stem from a lack of commercial success, as many funds don't attract enough money to be profitable for fund providers. In some cases, entire fund companies folded after closing all their funds. 

FUNDS ON LIFE SUPPORT
The 10 exchange-traded funds (ETFs) below could be in danger of closing. All 10 have meager average trading volume and paltry assets under management — two warning signs. To be sure, fund companies typically give their products ample opportunity to succeed. On average, the 128 funds that closed in 2016 were nearly four years old.
Fund (Price; Ticker)
Age
(Months)
Assets
($Mil.)
Avg.
Daily
Trading
Volume
Exp.
Ratio
(%)
12-
Month
Return
(%)
iShares Currency Hedged Europe
($28; HEUS)
19
1.4
106
0.43
14.4
iShares Currency Hedged MSCI
($27; HACW)
23
2.7
409
0.36
20.8
Legg Mason U.S. Diversified Core
($29; UDBI)
17
3.0
127
0.30
13.8
PowerShares EuroPacific Low Vol.
($27; FXEP)
19
1.4
70
0.25
10.3
PowerShares S&P 500 Momentum
($29; SPMO)
19
1.4
809
0.25
13.7
ProShares S&P 500 Ex-Financials
($49; SPXN)
20
1.2
77
0.27
14.8
ProShares Ultra Oil & Gas Explor.
($24; UOP)
23
1.2
375
0.95
(3.8)
SPDR MSCI China IMI ($20; XINA)
19
2.0
144
0.65
2.4
WisdomTree Global ex-U.S. Div.
($25; DXUS)
24
5.1
436
0.44
17.2
WisdomTree U.S. Export and Multi.
($29; WEXP)
22
1.4
464
0.33
22.8

Brokers typically notify shareholders when a fund is closing. While timing depends on the fund provider, investors generally receive a two- to six-week warning.

You have two options if one of your funds announces it is closing. For a commission, you can sell in the open market prior to the closing date, just like under normal trading. Funds on the chopping block may see their bid-ask spreads widen, so we recommend you use use limit orders, which are executed at a specific price. Before setting a limit order, it's helpful to learn the approximate per-share value of a fund's underlying holdings. Called the intraday indicative value, it shows the reasonableness of a fund's market price. To find the value, use a fund's ticker with "IV" added at the end.

The lazy option — and one we don't recommend — is to do nothing. Investors who hold onto a fund will typically have their shares automatically liquidated for cash based on net asset value (NAV) on the last day of operation. While liquidating avoids a commission, the ending cash value might differ from the final market price. Moreover, cash values may be reduced by expenses incurred to sell holdings
and wind down operations. In rare cases, a fund may be delisted and not liquidated, forcing investors to sell shares in the over-the-counter market, a process that can be difficult.

For income-tax purposes, the outright sale or liquidation of a fund will generate a gain or loss depending on an investor's cost basis. A liquidated fund may also distribute a capital gain from the sale of its securities.

OUR RECOMMENDED MUTUAL FUNDS

Through May 9, our Growth Portfolio has climbed 8.1% in 2017, compared to 7.7% for its passive benchmark. The Conservative Portfolio is up 7.3%, versus 6.9% for its benchmark. The list below represents our top fund picks across 17 different categories. Investors wishing to mimic our Growth and Conservative Portfolios should purchase the funds listed in the proportion suggested by the target weight.

Year-To-Date *
Target Weights
Fund (Price; Ticker)
Total
Return
(%)
Rank
Conser-
vative
(%)
Growth
(%)
Fund
Rating
Baird Core Plus Bond ($12; BCOSX)
1.6
B
7
3
88
Dreyfus MidCap Index ($37; PESPX)
4.3
D
0
0
84
Dreyfus Small Cap Stock Index
($30; DISSX)
1.3
D
0
0
94
Fidelity Overseas ($46; FOSFX)
16.4
B
11
12
88
iShares MSCI EAFE Small-Cap ETF
($57; SCZ)
15.1
D
6
8
88
PRIMECAP Odyssey Stock ($28; POSKX)
9.3
A
7
8
94
T. Rowe Price QM U.S. Small-Cap
($31; PRDSX)
8.5
C
4
4
95
Vanguard 500 Index ($222; VFINX)
7.7
B
9
10
77
Vanguard GNMA ($11; VFIIX)
0.7
C
0
0
97
Vanguard Growth Index ($65; VIGRX)
13.3
C
10
11
88
Vanguard High-Yield Corp.
($6; VWEHX)
3.5
C
5
3
95
Vanguard Inter.-Term Tax Exempt
($14; VWITX)
2.2
B
0
0
84
Vanguard Mid-Cap Value ($40; VMVIX)
5.6
A
7
10
92
Vanguard Short-Term Invest.
Grade ($11; VFSTX)
1.0
B
7
3
99
Vanguard Small Cap Value Index
($29; VISVX)
1.5
B
4
4
98
Vanguard Strategic Small-Cap
($35; VSTCX)
1.6
D
4
4
92
Vanguard Total Bond Mkt. Index
($11; VBMFX)
1.2
D
0
0
44
Vanguard Value Index ($37; VIVAX)
3.3
D
9
10
96
Vanguard Wellesley Income
($26; VWINX)
2.8
E
0
0
99
Vanguard Wellington ($41; VWELX)
4.5
D
10
10
99
* Through May 9. Ranks compare funds with same objectives: A = top 20%; B = next 20%; C= middle 20%; D = next 20%; E = bottom 20%. Fund ratings are percentile ranks, with 100 the best.

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