Investor due diligence required as ETF closures in Europe mount

Tom Eckett

a close-up of a key chain

ETF closures are a regular part of the ecosystem, however, with the number on the rise, investors must do their due diligence if they want to avoid the hassle of reacting to an issuer halting trading on a product.

Issuers have been launching ETFs at a tremendous rate since the Global Financial Crisis in an attempt to capture the huge flows coming into the market, however, this has not come without its problems.

Failure to capture assets more often than not leads to the ETF being closed and subsequently re-launched later down the line.

ETF closures have been steadily increasing over the past few years. According to data from Morningstar, there were 152 closures in Europe last year compared to just 108 in 2014.

Last week alone, UBS Asset Management shut a multi-factor equity ETF just 16 months after launch while DWS closed trading on 12 ETFs.

Both issuers cited a failure to capture assets as the reason with the German asset manager going as far as saying closures are “an ordinary part of the business”, in a note to investors.

However, for investors, fund closures can be a real headache. Not only can it be problematic and costly but can cause short-term issues for a portfolio.

Portfolio construction and the way in which each product fits into a strategy is fast being recognised as the crucial part of the investment manager’s job.

With a closure, the manager must go out to the market and find a strategy similar that does the same job, no mean task. Therefore, avoiding the ETFs that shut should be a top priority for investors.

The size of the ETF is evidently the biggest tell-tale sign an ETF is at risk of closure and more often than not is the reason for closures. According to data from Morningstar, only 15% of all ETFs closed in Europe have ever breached €50m with this figure dropping to 5% for ETFs with assets over €100m.

The seemingly never-ending fee war has seen prices drop rapidly over the past few years. While this has undoubtedly been beneficial for investors, ETF issuers now need far larger assets under management in each of their funds for them to be profitable.

For example, an ETF with a total expense ratio (TER) of 0.50% needs around €50m just to break even and anecdotally, industry commentators always mention the €100m mark as the key milestone for an ETF’s survival.

As the landscape becomes more competitive with more asset managers looking to capture a piece of the pie, it is becoming an even greater challenge to capture assets. A small ETF is simply not profitable for issuers meaning the likelihood of closure is far greater.

Along with small assets, Weixu Yan, investment manager and head of ETF research at Close Brothers Asset Management, said investors should look for the trend of the AUM, if it has been declining, improving or just steady.

“Additionally, I judge how attractive the product is for investors. If the ETF is clearly overpriced and not doing a good job at tracking then the AUM will decline and the ETF might be closed,” Yan added.

The death of an ETF – how to break the news

If an ETF does close, Kenneth Lamont, ETF research analyst at Morningstar, explained investors can lose out on the costs of selling and reinvesting in a new product.

When an issuer announces it is closing an ETF, investors can decide whether to sell out of the ETF prior to the liquidation date or wait until that date, where the ETF will be sold by the issuer at the NAV price.

“This can be inconvenient because of the additional due diligence and search costs associated with finding a suitable new investment,” he continued. “As with any forced sale there may also be unwanted tax implications.”

It is likely ETF closures will continue to rise as more and more products hit the European market making it even more important investors do their due diligence when first investing in a strategy.


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