Don’t Let Dying ETFs Snare You

trapThe popularity of exchange-traded funds has hardly wavered, even through the depths of the bear market. As a result, you can seemingly find a new fund anywhere you look. But in a sign of the times, some ETFs have decided to pull the plug after failing to attract a big following from investors.

A major provider of exchange-traded financial products, Invesco PowerShares, announced earlier this month that it would liquidate 19 of its ETFs.

As you can see, although the funds span across the spectrum of market sectors, none of the ETFs has a huge amount of assets under management. Although the 19 liquidating ETFs make up nearly one-seventh of the fund company’s 135 ETF offerings, their combined assets add up to less than 1% of the amount that the company manages.

What’s going on?
The closing of these funds isn’t as bad as it sounds. Once a closing fund stops trading — today is the last day for the 19 PowerShares funds — the fund liquidates its assets, and shareholders eventually receive the value of their proportional share of those assets in cash. So while a shareholder may realize a gain or a loss — along with any tax implications that go with it — it’s not as if investors lose everything just because the fund closes.

In fact, in many ways, it’s heartening to see fund companies starting to pull the plug on some of their less successful funds. Like any other business, fund companies have to evaluate the potential market for a given ETF before they release it. With a significant amount of fixed costs involved in establishing and maintaining a fund, fund companies only earn significant profits once funds grow beyond a certain point.

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