Red skies in the morning, sailors take warning. Things are looking red this morning as investors worldwide are remembering risk, central banks notwithstanding. One risk of ETF investing is that a fund closes and experiences wide swings in its final days. The ETFGsm Liquidation Watch List is meant to keep you out of those funds with the most risk of closing. It can be found under the Analytics button and is covered in a monthly column we write at Wealthmanagement.com.
June’s list contains 71 products that have existed for at least two years, hold less than $5 million in assets and have negative performance for the trailing twelve months. 71 is a high number as is the 40 funds that have already closed in 2013. Many of the listed funds are niche products and almost half of them are ETNs. When an ETN closes, deviations from NAV are not much of a concern because holders will receive their fair value based on the index the product tracks. But that is where problems can arise. Many products track indices that exist solely for those products and as offerings have become more niche and complex, so have the indices, which can complicate an unwinding. Sponsors have become more creative in structuring indices to deal with liquidity constraints in the markets they track so a final liquidation value may not resemble the spot market price.
Only five funds on this month’s Liquidation Watch List are equity