Costly Business
Running a standard index-tracking ETF costs about $250,000 every year, after startup expenses of at least $2 million, according to Sam Masucci, chief executive of ETF Managers Group, a company that helps aspiring fund providers get established for as little as $75,000. Those that are more niche products, requiring leverage or derivatives for example, require more capital to sustain them. Shuttering funds allows those resources to be re-allocated.
The process of closing an ETF is simple. The provider alerts the Securities and Exchange Commission that the fund is to close and contacts exchanges, broker-dealers, market makers and investors to communicate the date it will stop trading. The ETF will then be delisted and dissolved, with the remaining shareholders receiving their portion of the proceeds from the liquidation.
One reason ETF managers may be loathe to close funds is the proceeds can be subject to capital gains taxes, making the investments less tax efficient, which is one of their key selling points.
With the global ETF universe set to grow to $15 trillion over the next decade according to exchange Bats Global Markets Inc., liquidations will become a natural part of the market fabric.
“We don’t want products that clients aren’t interested in trading,” said Sylvia Jablonski, head of capital markets and institutional strategy at Direxion. “We do everything we can to get the word out and let the investing public know that the product is there. But then, at the end of the day, it’s really up to the client.”
This article was provided by Bloomberg News.