WHAT TO DO WHEN YOUR ETF CLOSES

EVERYBODY knows starting a restaurant is a risky business.

- KIM CLARK

But most investors may not realize that cooking up a new exchange-traded fund recipe has a surprisingly high failure rate as well. And that can cause some unpleasant surprises for investors who’ve bought shares in funds that shut down. When funds liquidate, they distribute the cash value of their holdings to investors, potentially triggering unplannedfor taxable capital gains or losses.

Fortunately, investors who stick with large, broadly diversified ETFs generally don’t have to worry about closures, says Daniel Sotiroff, a senior analyst for investment research firm Morningstar. Likewise, limiting investments in risky ETFs to tax- deferred accounts will eliminate closure-related tax headaches.

But anyone who has taken, or is considering taking, fliers on smaller funds, especially ones with risky, niche or region-specific strategies, should limit their stakes and take a few steps to protect themselves, advisers say.

More common than you think. For starters, recognize how frequent ETF closures are. Fund sponsors expect fees, charged as a percentage of assets, to (at least eventually) cover their operating expenses and lead to profits. Consequently, companies tend to shut funds that fail to attract enough assets; consistently underperform and thus are likely to drive investors away; or face challenges such as investing in areas affected by geopolitical conflicts.

In fact, about one-third of all ETFs ever started have shut down, Morningstar calculates. Over the past 10 years, that has added up to 1,550 shuttered funds. In 2024 alone, despite inflows of more than $1 trillion into ETFs overall, 189 closed (an above-average number).