Last Updated on December 30, 2018 by Mr. FightToFIRE
In my article about PRIIPs, I briefly mentioned that the European alternatives to the now unavailable US-based Exchange-Traded Funds (ETFs) more often than not are smaller in fund-size and that it doesn’t matter too much in the end. I wish to elaborate on that more.
While size isn’t a concern for most funds, it is something you need to pay attention to if you consider the more exotic funds out there. An ETF can have multiple reasons to get liquidated with the size more often than not being the main reason.
Low trading volumes
First, there are cases where there is not enough trading volume due to the fund being listed in multiple exchanges.
If the volume on a certain exchange is too low, the issuer can decide to delist is from the said exchange.
If this happens, not a lot of changes for the trader. He keeps his shares and they will get moved to the new exchange. There is one possible downside to this, if it pertains a move to a higher costing exchange, higher transaction costs might apply.
A complete shutdown
Instead of a delisting on one exchange, it’s possible for an ETF to get completely removed by its issuer. In general, an ETF is in danger of getting liquidated or shutdown once the fund size falls below 10 million (though some articles suggest 50 million dollars). You might not have noticed this, but closures happen every year. It has happened to quite a few actually (iShares alone closed 20 in August).
If a fund becomes too small, it’s not profitable anymore for the company managing these funds. Even these passive funds need to bring in revenue after all.
The end of the line
A closure isn’t the end of the world of course. It can get costly and it remains inconvenient. You purchased the fund for a reason after all.
Once a provider decides to close an ETF, a prospectus supplement will state the ETF’s last trading date and its liquidation date (if it has one).
At this point, or soon after, “business as usual” stops. The fund halts any actions and as it prepares to convert to cash. This causes ETF performance to diverge from the performance of its underlying index.
During this period, the issuer will continue to publish indicative net asset value (iNAV) throughout the day, and should still be referenced when selling the ETF. It’s generally advisable to sell any remaining shares you may hold before the last day of trading. This way you are sure about what you will get.
The reason for this publication is because the liquidation happens on the NAV and not its last stock price.
An example of this is the tracker BNP Paribas Easy Stoxx Europe 600 Telecom (SYT; FR0007068044) that disappeared from the Paris stock exchange on the 27th of August with a stock price of 765.50 EUR. The actual liquidation took place a few days later, however. In those few days, the NAV dropped a bit more resulting in an actual price of 744.2765 EUR.
When looking for European trackers as an alternative to their US-counterpart, just try to keep an eye out for the fund size as well. It can very well prevent future headaches.