I just got a notice that an ETF I own will termiate in 2 months if the shareholders don't vote for an extension.

I understand that if I kept the shares until the termination date, I would get a percentage of the assets. How would I be able to tell if that would be higher than the current market price? From what I read it would be better to try to offload the shares if the ETF will be closing.

What are the advantages and disadvantages to keeping the shares until termination date?

  • Is your ETF currently trading at a discount to net asset value? – Chris W. Rea Jul 18 '15 at 14:44
  • The current market price is less than the NAV according to yahoo finance. Please correct me if I'm looking at that wrong. It's about. 0.23 lower. – leeman24 Jul 18 '15 at 14:51
  • By "percentage of the assets", does that mean you'll get shares, or cash, or shares + cash for fractional shares? – Chris W. Rea Jul 19 '15 at 14:02
  • They will not be issuing anymore shares since if it is terminated. It would be cash only. – leeman24 Jul 22 '15 at 16:50
  • I am also concerned that the company borrows against its capital and that would negatively affect the assets so the share price at termination would be higher than what would be given out if they split up all of the assets. – leeman24 Jul 22 '15 at 17:06

If you sell it before liquidation, you get the benefit of knowing what you're getting. If you wait until liquidation, you'll get NAV (there's no market price since it's no longer trading). If it's trading at a steep discount, you should, in theory, hold. Due the nature of ETFs, sustained discounts (or premiums) are highly suspect. If there was an arbitrage opportunity, market makers would buy the ETF and sell the underlying narrowing the discount. The fact that it exists could be evidence that the NAV is wrong. Keep in mind, published NAV is based on yesterday's close, like a mutual fund. For ETFs, there's iNAV or IIV, the Intraday Indicative Value. ETF market makers make their own pricing models and as a result, could steer the ETF away from the issuers published IIV. This is common with illiquid underlying symbols.

I would say this depends entirely on the situation. If it's a domestic equity fund, you should be able to get a fair enough market rate. If it's a foreign bond fund, well good luck. For a passive investor, bid/ask spread of the ETF can give an idea of how accurate the market's pricing is. Some ETFs have spreads of $0.01 but only trade a couple times per day. In this case, you could still expect a good price.

  • Thanks for the answer. Fortunately it doesn't look like the ETF will be closing at this time so i'll be okay for now but the advice is helpful. – leeman24 Nov 20 '15 at 19:34

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