“The exchanges require that after a certain period, a fund must have at least 50 beneficial owners to continue to qualify for a listing,” she says, adding that while the exchanges may have been more flexible in the past, “the rule is now being more strictly enforced.”
The logical move for investors would be to look up the number of beneficial owners before buying a fund, but you won’t find the data in a fund’s prospectus. Yet it may be wise to assume that a fund “with low assets and thin trading after a year of operation may be a candidate for an eventual delisting,” Doberman says.
She also thinks more funds are being shuttered on a voluntary basis as well. “From a practical perspective, there’s a scarcity of capital at banks. They are looking to re-allocate their resources into the most productive funds.”
In some cases, the volume of fund closures at specific firms has been eye-catching. In August, for example, UBS closed nine of its Etracs exchange-traded note offerings.
And even the mighty iShares complex recently closed 10 ETFs, with a similar amount of funds closed by State Street and ProShares. It’s not just thinly-traded ETFs that are being shuttered. Five State Street funds, for example, had more than $50 million in assets each.
The fact that funds of that size are candidates for liquidation is a clear reflection that the ETF field may be getting too crowded. “The proliferation of funds in recent years has become a clear factor [in the recent wave of closures], and a winnowing process is inevitable,” says Doberman. She sees a shakeout in terms of both funds and smaller fund sponsors, suggesting that we might see a lot of industry consolidation.
CFRA’s Rosenbluth says investors should seek out larger, more frequently traded funds to help reduce the chances owning a candidate for liquidation. Choosing the larger fund also likely brings the added benefit of smaller bid/ask spreads, a key consideration for active ETF traders.
By no means is the ETF complex in trouble. Assets continue to migrate away from higher-cost mutual funds to lower-cost ETFs, and traditional mutual fund firms such as Fidelity are launching new ETFs at a quickening pace. But the rising tide of ETF closures suggests that investors should think twice before investing in a fund that has already been trading for a number of years and still has a modest asset base.