Exchange-traded funds, or ETFs, are a type of investment that has become increasingly popular in recent years. But do ETFs have an expiration date? We’ll look at what happens to ETFs when they reach their end of life. We’ll also discuss some potential risks associated with investing in expired ETFs.
Do all investments have expiration dates?
Before moving onto the main topic at hand, there is a need to address the common misconception that all investments have an expiration date. In reality, most investments do not have a set expiration date. Stocks, for example, can be held indefinitely.
Most bonds, on the other hand, do have a maturity date on which the bond will mature and repay the principal to the investor. Once a bond matures, it can no longer trade it on the secondary market. This is kind of an expiration date, as it means the trader cannot hold onto the bond forever.
So, what about ETFs?
Like bonds, ETFs have a defined lifespan. ETFs are structured as open-ended investment companies, meaning they have a continuous offering of shares. When an ETF reaches the end of its life, it is said to ‘terminate’. At this point, the ETF will stop issuing new shares and will begin the process of liquidating its assets and distributing the proceeds to shareholders
The exact date an ETF will terminate can vary, but it is typically announced well in advance. For example, the SPDR S&P 500 ETF (SPY) has a stated objective of ‘providing investment results that, before expenses, generally correspond to the price and yield performance of the S&P 500 Index’.
As such, the fund is designed to track the index for the long term. However, there may come a time when the fund’s managers feel it is no longer possible or advisable to continue tracking the index. In this case, the fund would be terminated.
Possibility of premature termination
While ETFs are designed to be long-term investments, there are several reasons why an ETF might be terminated prematurely. For example, a fund might be closed if it becomes too small to be economically viable or if its underlying index is discontinued. In some cases, an ETF might also be closed due to changes in regulations.
What happens near an ETF’s expiration date?
Investors who own shares of an ETF set to terminate will typically receive a cash payout equal to the net asset value of their shares. However, there are a few things to keep in mind before investing in an ETF that is nearing the end of its life.
First, it’s important to remember that ETFs are subject to market risk, just like any other investment. It means that the value of your shares can go up or down in response to changes in the underlying assets. In an ETF about to be terminated, the fund’s managers may sell off assets to generate cash for shareholders.
Second, you’ll want to consider the fees associated with the ETF. When an ETF terminates, shareholders may be charged a ‘termination fee’ by the fund’s managers. This fee is typically a percentage of the total value of the assets in the fund, and it can eat into your investment returns.
Finally, you’ll need to be prepared for the possibility that the ETF might not be able to meet its stated objective. For example, if an ETF tracking the S&P 500 Index is terminated, you might not receive the same level of diversification as you would if you invested in a traditional index fund.
What should I do if I want to sell my ETF holdings before the expiration date?
If you’re interested in selling your ETF holdings before the expiration date, you’ll need to contact the ETF’s issuer to find out how to do so. In most cases, you’ll be able to sell your shares on the secondary market. However, it’s important to remember that you may not receive the same price for your shares if you hold them until the expiration date. Fees and other charges may also apply.
The final word
Investing in an ETF can be risky but especially so when done near its termination. Therefore, it is essential to do your homework before making any decisions. However, if you’re comfortable with the risks, investing in an ETF at any stage can be a great way to get exposure to a wide range of assets in an easy manner.