The death of an ETF – how to break the news

“ETFs close all the time.” So says Peter Sleep, senior investment manager at 7IM. Obviously the news is accompanied by less fanfare than a new fund being launched, but as Sleep observes, the natural life-cycle of an ETF means that by his estimation “one or two close very week”.

A recent example of a closure was flagged by one source who pointed out that State Street’s SPDR Bloomberg Barclays 5-7 Year US Treasury Bond UCITS ETF disappeared from their screen at the end of February. The closure was accompanied by shareholder notice that went out to investors via Euroclear.

Our correspondent noted that State Street had done what it was bound to do but they questioned if there is more that providers can do.

“I understand that ETF providers don’t want to make a song and dance about fund closures but I think they should at a minimum inform their readership (including MPS allocators) of the change.”

In response to our query, State Street were wholly forthcoming. The head of marketing for EMEA and Asia Pacific SDPR ETFs Sarah Higgins took the time to tell ETF Stream that with ETFs, the company doesn’t have transparency into underlying unitholders beyond the nominee accounts, so the company provides a shareholder communication to the common depositary and they then notify the underlying unitholders via the relevant custodians.

Sleep notes that the depositary is there to safeguard shareholders’ interests and will be intimately involved with the winding up of any fund and will be responsible for notifying the custodian of any corporate action.

Giving notice

“The custodian will notify the shareholders so they can take appropriate action. In the case of the SPDR one month’s notice was given, which should be ample time for shareholders to act.”

“We are necessarily reliant on the chain of custodians and brokers to inform holders of such changes,” says Higgins. “We also take additional steps to reach as many investors as possible: for example we place the shareholder notice and banners on the product page of our website notifying investors of the changes and where we are aware that a client is holding a fund, we would also communicate directly to them.”

In this instance, as mentioned above the shareholder notice was published on 28 January and investors were notified that the last trading date of the funds would be 27 February 2019, with closure and delisting taking place on 28 February.

“We endeavoured to reach as many investors as possible in a timely way,” she said.

As for what else can be done, there is the example from the US.

“We’d welcome a discussion with regulators to implement a SEC 13F style filing that allowed us greater transparency into the holders of ETFs, but at present that does not exist in Europe.”

Higgins is referring here to the SEC requirement that requires an investment manager to file, within 45 days of the end of a calendar quarter, the disclosure of the name of the institutional investment manager that files the report and the details of each security over which it exercises investment discretion. This includes the name and class, the CUSIP number, the number of shares as of the end of the calendar quarter for which the report is filed, and the total market value.

Whether this level of oversight (and paperwork) would go down well with the investment managers is, of course, a moot point.

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