What Happens If Your ETF Closes?

Like any business, exchange-traded funds (ETFs) can close up shop. But with so much riding on your investments, you want to be sure your ETFs are as sound as possible.

"Some ETFs are much more susceptible to closure than others," says 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."

Leveraged and inverse ETFs—which use derivatives and/or futures contracts in an attempt to provide either a positive or a negative multiple of an index's performance—are most prone to closure. In fact, 47% of all such funds have closed down, compared with a closure rate of 28% for nonleveraged, noninverse ETFs.¹ "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. "Standard ETFs, on the other hand, typically close down because they aren't attracting enough assets to be profitable for their issuers."

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

Investors should be cautious of the higher potential for closure with funds that have less than $20 million in assets. Funds with more assets are generally more likely to be considered profitable for their issuers and therefore more likely to endure. 

On average, funds that close tend to do so within three to five years of their inception.

Given their high closure rates—as well as other inherent risks—you may want to avoid inverse and leveraged products altogether.

You generally have two options for retrieving your principal:

• Wait for the payout: If you retain your shares until the fund closes, you'll 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 since 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.
• Liquidate immediately: Selling your shares before the closure date allows you to reinvest the principal more quickly, since the standard settlement for ETFs traded on national exchanges is just two business days. You'll receive the bid price when you sell, which is typically slightly less than the value of the fund's underlying investments.

Be mindful, too, of the potential tax consequences. "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," Emily says.