Page 29 - DIY Magazine March 2018

WHAT HAPPENS IF AN ETF IS LIQUIDATED?
Unprofitable ETFs get closed; this isn’t as bad as
it sounds but it is worth avoiding. The main thing to remember is that you don’t lose your money if an ETF is liquidated, unlike if a company’s shares went to zero.
The underlying assets of the ETF are still worth their market value so you can either sell your ETF shares on the stock exchange as usual or wait until the ETF provider sells the remaining assets. Either way, you’ll receive the net asset value of your ETF shares at the time of sale as a cash sum.
Naturally, you can then reinvest your cash back into the market, perhaps in a more viable ETF in the same category.
There are two main problems with being forced into cash by an ETF’s liquidation:
1. The market can move against you before you’re able to reinvest your cash. This is a particular risk if you wait for the ETF provider to liquidate the product as there can be a week or so delay before you receive your cash.
2. You can incur capital gains tax if you’re forced to sell a position outside of tax shelters and can’t cover it with your capital gains allowance.
Your ETF may also be merged with another to create a viable product and this can also count as a taxable capital gains event as above.
Of course, not all small ETFs are at risk of closure. A provider may expect certain products to remain niche and cover their costs with a higher expense ratio, or subsidise them for strategic reasons.
Still, ETF closures are unsettling and inconvenient when they happen, especially if they expose you to an unexpected tax event. You can guard against this on justETF.com by checking the fund size category when comparing ETFs in any particular market. We provide fund size in millions of £ and the bigger it gets, the less liable an ETF is to close.
ETF Search At justETF gives you additional features to help refine your ETF selection including index description, filters and comparison tools and a full profile of each product - you’ll soon be building your own DIY profile of ETFs!
29 DIY Investor Magazine | Mar 2018