NEW YORK ( TheStreet) -- It is hard not to ignore the latest spurt of fund closures hitting the ETF industry.In the time since the SPDR S&P 500 ETF ( SPY) first appeared on the scene in the early 1990s to today, the exchange-traded fund industry has exploded in popularity. Today, with funds such as Market Vectors Steel ETF ( SLX), iShares Gold Trust ( IAU) and PowerShares DB Agriculture Fund ( DBA), investors can efficiently tap into not only broad markets, but also individual slices and subsectors of the economy. ETFs have also opened the doors to the global economy, with funds such as iShares MSCI Taiwan Index Fund ( EWT) and Market Vectors Brazil Small Cap ETF ( BRF). While many of these funds have proven attractive to retail investors, there is a large number of ETFs which have failed to generate interest. Recently, a number of fund companies such as Guggenheim and Grail have made efforts to trim their fat, dropping select products from their line ups. At the same time, other ETF sponsors such as Geary Advisers and Old Mutual have closed the door on their entire ETF families, abandoning the industry altogether. Throughout this Darwinian period, companies have taken two separate approaches to closing their products: closing and restructuring. As more cuts are made in the future investors should know how each process works. PowerShares is the most recent of these firms to take the axe to its fund family. This week, the firm announced that it would close 10 of its least popular products. Some of the funds up for execution include the PowerShares Nasdaq-100 Buy Write Portfolio ( PQBW) (PQBW), the PowerShares Global Biotech Portfolio ( PBTQ), and the PowerShares Dynamic Healthcare Services Portfolio ( PTJ). Each of these funds has struggled to generate interest, boasting average trading volumes under 20,000. According to its press release, the PowerShares products will follow a similar closing protocol as most other closed funds. On Dec. 14, the 10 funds slated for execution will cease trading. Up until this date, investors will be free to trade these funds in a normal fashion. Those who do not sell their shares on or before Dec. 14 will receive a cash distribution equal to the net asset value on Dec. 22, which is the funds' scheduled liquidation date. The biggest trouble with this closing procedure is that between the fund's closure and liquidation, investor money will be tied up. While PowerShares is taking a traditional approach to closing unpopular products, there is another way companies have opted for in order to drop funds. This second process involves restructuring an old product into something entirely new.
Claymore, now known as Guggenheim, recently went down this route when it announced its plans to change Claymore/Sabrient Stealth ETF ( STH) into the Wilshire Micro-Cap ETF ( WMCR). The company could have closed STH and launched WMCR. However, the firm instead opted to change STH's underlying index, name, and ticker symbol, thereby completely altering the fund's focus. There was no need to halt STH's trading or liquidate fund's assets. One day investors were holding STH and on the next, WMCR appeared in its place. While investors do not have to worry about remembering closure dates or having their money being tied up in this scenario, this unique type of fund closure can also cause troubles. For instance, in the event that an unprepared STH investor was also holding a fund such as the First Trust Dow Jones Select MicroCap Index Fund ( FDM), the investor could get caught with overexposure to this volatile part of the market when STH turned into WMCR. The recent spell of fund closures hitting the ETF industry has brought to light the importance of avoiding unpopular, illiquid funds which stand the greatest risk for shuttering. However, in the event that you are caught holding a product that gets slated for execution, it's possible to avoid headaches by paying close attention to how the fund's closure progresses. Written by Don Dion in Williamstown, Mass.
Readers Also Like: