Etfs Delisting: What Happens To Your Investments?

If an ETF delists, it means it can no longer be bought or sold. A fund company can delist an ETF for various reasons, such as a lack of investor interest and assets. When the fund closes, it is liquidated shortly after a specified date, and investors receive their share of the proceeds from the liquidation. The liquidation can create a tax event, so investors may owe capital gains taxes on any profits received when their shares are redeemed. In general, investors can expect to get their investment back when a fund closes. However, investors who fail to sell their shares before the last trading date will be forced to trade over the counter, which is a less liquid, more cumbersome, and generally more expensive process than trading on an exchange.

You'll get your money back

If an ETF delists, it means it can no longer be bought or sold. When this happens, investors will usually receive a notification a few weeks in advance. The ETF will control all the assets in its portfolio until the date set for its liquidation, at which point the manager will sell the assets and distribute the proceeds to investors.

In general, investors can expect to get their investment back when a fund closes. However, there have been instances where the process wasn't smooth. For example, years ago, SPA ETF liquidated six U.K.-based ETFs and stuck investors with a liquidation bill that ultimately cost 10% of the NAV.

If you retain your shares until the fund closes, you may receive a cash distribution after the remaining assets have been liquidated. 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.

If you want to exit your investment upon notice of an impending liquidation, you can sell your shares on the open market. A market maker will buy the shares, and they will be redeemed.

You can sell your shares before the ETF closes

If you sell your shares before the ETF closes, you can avoid the challenges of trading over the counter. When an ETF delists without liquidating its portfolio, investors who don't sell their shares before the final trading day will be forced to trade over the counter, which is often a less liquid, more cumbersome, and more expensive process than trading on an exchange.

Selling your shares before the ETF closes also allows you to reinvest the principal more quickly. From 28 May 2024, the standard settlement for ETFs traded on national exchanges will be one business day instead of two.

You can also avoid unexpected tax consequences by selling your shares before the ETF closes. In taxable accounts, ETF closures are treated like sales and may create unexpected tax consequences. For example, 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.

Finally, selling your shares before the ETF closes means you don't have to worry about the fund's price diverting from its net asset value (NAV). Once the decision to liquidate an ETF has been made, its price will start to divert from its NAV (the total value of the underlying securities it represents).

You can wait for a payout

If you don't want to sell your shares before the ETF closes, you can wait for the payout. This means you'll receive a cash distribution after the remaining assets have been liquidated. The distribution per share will usually be close to the net asset value per outstanding share at the time of the fund's closing.

Most final distributions are made to investors within three to five business days of an ETF's delisting, but some have taken a week or longer. It's important to note that receiving an ETF payout can be a taxable event, so you may owe capital gains taxes on any profits received when your shares are redeemed.

Waiting for the payout can be a less costly and cumbersome option than if the issuer decides to simply delist the ETF. However, if an ETF delists without liquidating its portfolio, investors who fail to sell their shares before the last trading date will be forced to trade over the counter, which is a less liquid, more cumbersome, and generally more expensive process than trading on an exchange.

To ensure you don't miss the deadline to sell your shares before the ETF closes, carefully read the prospectus supplement as it will outline the process and key dates. Usually, investors only have about two weeks to sell their shares from the moment the liquidation is announced.

Delisting may be due to a lack of investor interest

When an ETF is delisted, it means it can no longer be bought or sold. A fund company can delist an ETF for various reasons, including a lack of investor interest. This is the most common reason for an ETF to close. If an ETF has been around for over a year and still has its original seed money (usually $5 million), then it is a prime target for delisting, especially if it is niche.

When an ETF is delisted, the issuer will publish the fund's last trading date on the exchange (delisting), as well as its liquidation date (fund closure), in a prospectus supplement. On that date, the fund will cease its usual share creation as it prepares to convert to cash. As a result, its price will start to divert from its net asset value (NAV), or the total value of the underlying securities it represents.

If an ETF is delisted but not liquidated, investors who fail to sell their shares before the last trading date will be forced to trade over the counter. This is a significantly less liquid, more cumbersome, and generally more expensive process than trading on an exchange.

To avoid getting stuck with an ETF that may close, investors can look out for several warning signs. Firstly, ETFs that track narrow market segments are considered risky and require careful evaluation. Secondly, high trading volume is a good indicator of liquidity and investor interest. Thirdly, look at the assets under management (AUM) to determine how much money fund managers have to work with to achieve returns that please investors. Finally, review the ETF's prospectus to understand the type of investment, fees, expenses, investment objectives, investment strategies, risks, performance, and pricing.

Delisting may be due to poor returns

ETFs may close due to a lack of investor interest or poor returns. For example, investors may avoid an ETF because it is too narrowly focused, too complex, too costly, or has poor returns on investment. They may instead opt for a broader market-tracking ETF with solid year-to-year returns from a well-known investment company.

Leveraged and inverse ETFs are most prone to closure. In fact, 52% of all such funds have closed down, compared to a closure rate of 31% for non-leveraged, non-inverse ETFs. Standard ETFs, on the other hand, typically close down because they are not attracting enough assets to be profitable for their issuers.

If an ETF is underperforming, the investment company may decide to close the fund. ETFs tend to have low-profit margins and need sizeable amounts of assets under management (AUM) to be profitable.

If an ETF is facing closure, investors will typically receive notice a few weeks in advance. The ETF will control all the assets in its portfolio up until the date set for its liquidation, at which point the manager will sell the assets and distribute the proceeds to investors.

There are two options for investors:

• Wait for the payout: Investors can retain their shares until the fund closes and 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. Most final distributions are made to investors within three to five business days of an ETF's delisting.
• Consider immediate liquidation: Selling shares before the closure date allows investors to reinvest the principal more quickly. They will hopefully receive the bid price when they sell, which is typically slightly less than the value of the fund's underlying investments.

The closure of an ETF can create an unexpected tax burden. If the ETF is held in a taxable account, the liquidation can be treated as a sale, and investors may owe capital gains taxes on any profits received when their shares are redeemed.

Frequently asked questions