Dr. Tharp is out of the country for the next few weeks, but we’ll continue to post some questions that come up in his absence.
Question: I am concerned about the information you provided in a recent newsletter regarding the rate at which ETFs are being shut down. I’ve been trying to find the answer to the question you raised, “What happens if you own an ETF that gets closed?” Have you found an answer? I’ve been unable to so far.
Answer (from Ken Long): Once it is announced that an ETF will close, there is a period of time (3-4 weeks) that it is still traded. This is currently the case with the Ameristock Treasury bond ETFs, which will cease trading today.
In this time period, investors can buy or sell shares as they normally would. On the day that the ETF closes, all trading stops. The provider then has a period of time (about 2 weeks) to sell the underlying securities within the ETF.
The proceeds are then distributed to the owner of record. The owner will get the value of the securities from when they were sold, not when the ETF stopped trading. So, if you’re holding the ETF when it closes, you’re running the risk that the underlying securities could go down (or up) in value in that time frame.
If you want to know the value you are getting from your ETF, it might be better to sell the shares before the ETF stops trading. Otherwise, you’re left cooling your heels and won’t know what you’re going to get until the securities are sold and proceeds are distributed. It’s up to your risk tolerance.
But the closing of an ETF is an orderly process, and investors are given plenty of warning so they can plan accordingly.
