More ETFs are closing as funds crowd market

Offerings that are at least 28 months old and have less than $10M in assets seen at risk

Feb 13, 2011 @ 12:01 am

By Jessica Toonkel

With fund firms launching a seemingly endless parade of exchange-traded funds, a dark side to this glut of offerings is emerging: Portfolio liquidations, once rare, are becoming more common.

That trend is spooking some financial advisers. Indeed, some said that they are more than a little worried about getting stuck in an ETF that ends up being shut down.

“With the proliferation of ETFs, this is becoming a greater concern,” Sailesh S. Radha, a vice president at CCM Investment Advisers LLC, a registered investment advisory firm that manages $2.5 billion in assets, said last week at IndexUniverse.com's Inside ETFs conference.

For advisory firms such as CCM, which has a $20 million country rotation portfolio, choosing the right fund is vital to keeping clients' trust.

“Telling an investor that an ETF is shutting down is not news you want to give them,” Mr. Radha said.

But as more advisers rush into sector-based ETFs, the chance of being in a fund that closes is on the rise.

In 2006, just one ETF closed, according to Morningstar Inc. In 2007, none did.

But in the past three years, there have been 160 ETF liquidations.

Last year, Grail Advisors LLC, which is up for sale, and Claymore Securities Inc. closed a number of funds.

Grail closed two of its seven ETFs in August and Claymore closed four ETFs in October because they failed to attract assets.

SPOTTING TROUBLE

Advisers may be able to spot trouble before it strikes, said Ron Rowland, president of Capital Cities Asset Management Inc., who runs a monthly column about ETFs in danger of closing in his Invest with an Edge newsletter.

“There is no specific sector that is usually represented in the list, but it's a lot of smaller ETFs,” he said.

Mr. Rowland said that ETFs headed for trouble tend to have a similar profile. An ETF that has been around for at least 28 months and has less than $10 million in assets should raise a red flag for advisers, he said.

Mr. Rowland gives new ETFs a six-month grace period to gain assets before they become eligible for his ETF deathwatch.

It is important to pay attention to how long an ETF has been around.

“No one launches ETFs then closes them a couple months later, except for Northern Trust,” said Matt Hougan, president of ETF analytics at IndexUniverse.com.

Northern Trust Corp. closed 17 ETFs last February, just 11 months after launching them.

Advisers also should pay attention to how an ETF trades and whether the fund is best-in-class, said Matt Hougan, president of ETF analytics at IndexUniverse.com. An ETF may have very little in assets, but if it is one of the few funds in an asset class that is poised to take off, the fund may succeed, he said.

Advisers also should take note of the investment adviser for the funds.

If the firm manages a large number of profitable funds, it could buy additional time for laggards, said one executive at an ETF company, who asked not to be identified.

“As long as you have a few ETFs that are the moneymakers, you can afford to have a few that take longer to gain assets,” the executive said.

When ETF providers terminate funds, they often put out a press release and let investors know that the liquidation will take place in three to four weeks, conference participants said.

Often the providers will encourage investors to stay in the funds until they are liquidated, at which time the providers will pay the investors back. Mr. Rowland warns investors against being swayed by this pitch.

'SALES HOOK'

“The sales hook is that if you go with them through the liquidation, you save yourself the commission,” he said. “But the risks far outweigh the savings.”

For one thing, many ETFs hit investors with a termination fee. Also, fund operators often start liquidating ETFs slowly, which can lead to tracking errors during the wind-down period, Mr. Rowland said.

What's more, sticking with a fund through liquidation could cause advisers to lose an opportunity to put their money somewhere else.

“You usually get your money back within six to 10 days of liquidation,” Mr. Rowland said. “However, you have to wait those six to 10 days, and you may have lost an opportunity to employ that cash elsewhere.”

E-mail Jessica Toonkel at jtoonkel@investmentnews.com.

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

May 30

Conference

Adviser Compensation & Staffing Workshop

The InvestmentNews Research team will present exclusive data and highlights from its bellwether benchmarking study that will identify best practices for setting and structuring compensation and benefits packages throughout your... Learn more

Featured video

INTV

On the red carpet with Tom James and others at Icons & Innovators

Reflections from Jeffrey Gundlach, Edmund Walters and more at the New York City event

Latest news & opinion

Top 10 IBDs ranked by revenue

These independent broker dealers generated the most revenues in 2017.

8 podcasts advisers listen to when they aren't working

Listening to podcasts for the fun of it.

UBS continues to cut loans to recruits, while increasing compensation to brokers

The wirehouse reduced recruitment loans 20% and increased bonus loans 68% in the first quarter.

Things are looking up: IBDs soared in 2017

With revenue up, interest rates rising and regulation easing, IBDs are soaring.

SEC advice rule may give RIAs leg up over broker-dealers

Experts say advisers will be able to point to their role as fiduciaries as a differentiator in the advice market.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print