Fund companies may tell you (and your clients) to hold a fund until the last trumpet sounds, but the industry is willing to send funds straight to Sheol if things don't work out as planned.
Most fund companies preach holding for the long term, and that's generally a good thing. But in the past 15 years, 58% of domestic equity funds, 55% of international equity funds, and an average of 48% of all bond funds were merged or liquidated,
according to Standard & Poor's.
Poor performance and low assets are the main reason for companies to shut down a fund. Among mutual funds, a growing reason to close funds has been
fierce competition from passively managed funds and ETFs.
"We expect that as investors focus more on fund expenses and rotate to index products, active mutual fund closures and mergers will occur,"said Todd Rosenbluth, senior director of ETF and mutual fund research for
CFRA. "Asset managers are seeking scale to compete and concentrate their marketing efforts."
In the 12 months ended in March, fund companies have thrown about 300 funds to the scrap heap of history through liquidation, while another 183 met oblivion through merger, according to
Morningstar. If you count share classes separately, 2,260 funds have shuffled off to Palookaville in the course of a year.
Among those singing with the Choir Invisible: Fidelity International Bond, Federated Managed Volatility, Franklin Global Government Bond,
Goldman Sachs Long/Short, Janus Henderson International Equity and JPMorgan Latin America.
The Grim Reaper has come to call for fewer ETFs: 136, by Morningstar's count, and all were liquidated. Direxion sent 12 ETFs to their eternal rest, and
State Street Global Advisers played Taps for 19 SPDR ETFs.
(More:
ETFs see outflows for the first time since 2016)
What causes an ETF to be sent to a nice investment family upstate? According to website
ETF Deathwatch, those most likely to die have average daily dollar volume of less than $100,000 for three consecutive months, or have assets under management of less than $5 million for three consecutive months. As of February, 437 ETFs were on the deathwatch.
Owning an ETF in liquidation isn't pleasant.
The fund issues an addition to its prospectus, stating its liquidation date and when it will be delisted. At that point, the ETF stops trading creation units and its performance uncouples from its index.
Investors will typically get cash payouts equal to the ETF's net asset value. If the fund simply delists itself, those still holding shares after the delisting date will have to find buyers in the over–the–counter market.
(More:
Few places for advisers — or clients — to hide in this stock correction)
For those who own merged mutual funds, the process is smoother: Your fund's shares are exchanged for shares of the acquiring fund. You will be left, however, with the decision of whether you still want to own the new fund, whose objectives could be considerably different than the one that is now six feet under.
Newsletter
Mutual Fund Observer lists funds and ETFs scheduled for closure. Among those shuffling off this mortal coil: Fidelity Inflation-Protected Bond Fund (FINPX), which will be merged into Fidelity Inflation-Protected Bond Index Fund (FSIQX) this summer.
Also, Janus Henderson liquidated Janus Velocity Volatility Hedged Large Cap ETF (SPXH) and Janus Velocity Tail Risk Hedged Large Cap ETF (TRSK) on March 26, 2018.
