According to data compiled from Morningstar and Bloomberg Intelligence, the shuttered funds ranged widely across styles, asset classes and performance.
The best-performing fund to shut down last year was the VanEck Digital Assets Mining ETF (DAM), which was up more than 100% from the start of the year when it closed on April 24. Launched on March 7, 2022, DAM’s performance peaked just 10 days before it closed.
Twenty of the closed ETFs had registered gains of 20% or more from the start of the year on their closing dates.
Another ETF with a brief but strong run that closedlast year was the AXS 2X Bear Daily ETF (PFES), a single-stock ETF betting big on the negative movement of Pfizer Inc. stock.
Pfizer shares declined by more than 35% last year and PFES, which launched in July 2022, was up nearly 66% when it closed on June 6 of last year.
"We're seeing a lot of closures of ETFs launched during the hot period from late 2020 through early 2022 when pandemic fiscal stimulus and ultra loose monetary policy was juicing market returns, ETF inflows and interest in ETFs from all types of investors,” said Jeff Schwartz, president at fund research firm Markov Processes International.
ETF Closures and Ineffective Strategy
A number of the poorer performing funds closed because of ineffective strategies.
SPKY, which launched on Aug. 15, 2022, was designed for active traders and speculators looking to capitalize on volatility in the U.S. equity markets.
Another strategy that failed to deliver was the Noble Absolute Return ETF (NOPE), which logged a year-to-date loss of 68% at its liquidation on Aug. 24.
Launched in September 2022 to offer both long and short exposure to the global equity markets, NOPE might have also been hampered by its outsized expense ratio of 1.82%.
Contact Jeff Benjamin at Jeff.Benjamin@etf.com and find him on X at @BenjiWriter.
ETF closures hit a three-year high in 2023 with 246 funds shuttered, which is up from 147 in 2022 and 72 in 2021. Still, the total number of ETFs continues to climb as issuers launched 529 new funds last year, which is up from 419 in 2022 and 475 in 2021.
ETFs may close due to lack of investor interest or poor returns. For investors, the easiest way to exit an ETF investment is to sell it on the open market. Liquidation of ETFs is strictly regulated; when an ETF closes, any remaining shareholders will receive a payout based on what they had invested in the ETF.
In fact, so far in 2023, 929 ETFs have closed worldwide, up from just 373 this time last year, according to research from ETFGI. In the United States, 178 exchange-traded products have shut down, already exceeding last year's total of 142.
For most ETFs, selling after less than a year is taxed as a short-term capital gain. ETFs held for longer than a year are taxed as long-term gains. If you sell an ETF, and buy the same (or a substantially similar) ETF after less than 30 days, you may be subject to the wash sale rule.
So if an ETF provider goes bankrupt, your investments are not gone cause they will still be kept by the custodian. This separation is imposed by the European regulatory framework that governs financial services. In the event of a bankruptcy, another provider will then take over management of the fund.
Leveraged ETF prices tend to decay over time, and triple leverage will tend to decay at a faster rate than 2x leverage. As a result, they can tend toward zero.
A leveraged ETF is a fund that uses financial derivatives and debt to amplify the returns of an underlying index. Certain double or triple-leveraged ETFs can lose more than double or triple the value change of the tracked index. Therefore, these types of speculative investments need to be carefully evaluated.
There are a few reasons why ETFs generally die. Low assets under management, high fees, poor performance, and short track records are closely associated with the probability of closure. In 2023, there were 244 ETF closures with an average age of 5.4 years and average assets under management of only $54 million.
There are a lot of ETFs out there that are very popular, and there are a lot that are unloved. Over the last 5 years, an average of 110 ETFs closed per year (Source: Bloomberg). An ETF shutting down is not the end of the world. The fund is liquidated and shareholders are paid in cash.
Q: How does the wash sale rule work? If you sell a security at a loss and buy the same or a substantially identical security within 30 calendar days before or after the sale, you won't be able to take a loss for that security on your current-year tax return.
If you hold these investments in a tax-deferred account, you generally won't be taxed until you make a withdrawal, and the withdrawal will be taxed at your current ordinary income tax rate. If you invest in stocks and bonds via ETFs, you probably won't be in for many surprises.
Nearly all leveraged ETFs come with a prominent warning in their prospectus: they are not designed for long-term holding. The combination of leverage, market volatility, and an unfavorable sequence of returns can lead to disastrous outcomes.
"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," Emily says.
Interest rate changes are the primary culprit when bond exchange-traded funds (ETFs) lose value. As interest rates rise, the prices of existing bonds fall, which impacts the value of the ETFs holding these assets.
In theory, if Vanguard went bankrupt, your assets within the ETF should be safe, as they're technically yours held in trust by Vanguard. So if Vanguard collapsed, then what would likely happen would be that another manager would take over the ETF, or the assets would be sold off and you'd be paid out.
ETFs are open-ended funds, meaning they can constantly take on new investors and as they do, the fund's assets grow. CEFs have a fixed number of shares that are offered through an IPO. After that, no new shares will be issued and the fund is "closed."
The single biggest risk in ETFs is market risk. Like a mutual fund or a closed-end fund, ETFs are only an investment vehicle—a wrapper for their underlying investment. So if you buy an S&P 500 ETF and the S&P 500 goes down 50%, nothing about how cheap, tax efficient, or transparent an ETF is will help you.
ETF trading generally occurs in-kind, meaning they are not redeemed for cash. Mutual fund shares can be redeemed for money at the fund's net asset value for that day. Stocks are bought and sold using cash.
A leveraged ETF's price can theoretically go negative, but it's extremely rare and usually only happens in extreme market conditions. Leveraged ETFs use financial leverage to amplify the returns of an underlying asset, such as the S&P 500 Index.
Introduction: My name is Terence Hammes MD, I am a inexpensive, energetic, jolly, faithful, cheerful, proud, rich person who loves writing and wants to share my knowledge and understanding with you.
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