What Happens if Your ETF Closes?

May 28, 2024 Beginner
All is not lost if your ETF closes. Here's why it may happen and what to do if one of your funds shutters.

Exchange-traded funds (ETFs) offer investors a convenient way to invest in a portfolio of securities like stocks or bonds. Since 1993, when the first ETF was launched, more than 5,000 ETFs have been offered to U.S. investors. However, not all these funds have managed to survive. 

When an issuer decides to close an ETF, investors will typically receive notice a few weeks in advance. Because the ETF is a separate legal entity from the issuer that manages it, the ETF will control all the assets in its portfolio up until the date set for its liquidation, at which point the manager will sell the assets and distribute the proceeds to investors. 

After spending time researching and selecting an ETF, investors may be disappointed when an ETF closes, and they have to start this process from scratch. 

Likewise, for investors in taxable accounts, closures are treated like sales and may create unexpected tax consequences.

"Some ETFs are much more susceptible to closure than others," said Emily Doak, CFA, director of ETF and index fund research at the Schwab Center for Financial Research, "so it's important to be aware of certain characteristics when researching funds for your portfolio."

Which funds are most likely to close?

Leveraged and inverse ETFs—which use derivatives and/or futures contracts in an attempt to provide either a positive or negative multiple of an index's performance—are most prone to closure. In fact, 52% of all such funds have closed down compared with a closure rate of 31% for nonleveraged, noninverse ETFs, according to 2024 Morningstar data. 

"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," Doak explained. "Standard ETFs, on the other hand, typically close down because they aren't attracting enough assets to be profitable for their issuers."

Which ETFs are least likely to close?

There are no guarantees, but ETFs with these characteristics are less likely to close:

Significant assets under management:

It's important to watch how the assets of any fund grows over time. Many funds close due to low assets.

To determine a fund’s assets under management, log in to the ETF screener and select Total Assets under Basic Criteria, then select an asset range.

Longer life span:

On average, funds that close tend to do so within the first few years of their lives. Morningstar reports that the average age of the ETFs closed in 2023 was 5.4 years.

To determine a fund’s age, log in to the ETF screener and select Inception Date under Basic Criteria, then select a time frame.

Less-volatile strategies

Given their high closure rates—as well as other inherent risks—investors may want to avoid the aforementioned leveraged and inverse exchange-traded products

To determine a fund’s type, log in to the ETF screener and select Fund Type under Basic Criteria, then select Not Leveraged or Inverse next to Exchange Traded Funds.

What happens if my ETF closes?

You generally have two options for retrieving your principal:

  • Wait for the payout: If you retain your shares until the fund closes, you may receive a cash distribution after the remaining assets have been liquidated. The distribution per share will ordinarily be close to the net asset value per outstanding share at the time of the fund's closing, and because you're not trading your shares in the secondary market, you'll avoid the bid/ask spread. Most final distributions are made to investors within three to five business days of an ETF's delisting, though some have taken a week or longer.
  • Consider immediate liquidation: Selling your shares before the closure date allows you to reinvest the principal more quickly because the standard settlement for ETFs traded on national exchanges will move to just one business day from two on May 28, 2024. You'll hopefully receive the bid price when you sell, which is typically slightly less than the value of the fund's underlying investments.

Regarding potential tax consequences, Doak said, "If you've owned the fund for less than a year and it closes at a higher share price than you paid, you could owe taxes on any short-term gains, which are taxed at ordinary income rates." 

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Investors should consider carefully information contained in the prospectus or, if available, the summary prospectus, including investment objectives, risks, charges, and expenses. Please read it carefully before investing.

Leveraged ETPs (Exchanged Traded Products, such a ETFs and ETNs), seek to provide a multiple of the investment returns of a given index or benchmark on a daily basis. Inverse ETPs seek to provide the opposite of the investment returns, also daily, of a given index or benchmark, either in whole or by multiples. Due to the effects of compounding and possible correlation errors, leveraged and inverse products may experience greater losses than one would ordinarily expect. Compounding can also cause a widening differential between the performances of an ETP and its underlying index or benchmark, so that returns over periods longer than one day can differ in amount and direction from the target return of the same period. Consequently, these ETPs may experience losses even in situations where the underlying index or benchmark has performed as hoped. Aggressive investment techniques such as futures, forward contracts, swap agreements, derivatives, options, can increase ETP volatility and decrease performance. Investors holding these ETPs should therefore monitor their positions as frequently as daily. To find out more about trading Leveraged and Inverse Products, please read Leveraged and Inverse Products: What you need to know.

Investing involves risk including loss of principal. 

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. 

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed. 

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.