What to Do When an ETF You Invested In Is Termination In 45 Days

Investing in an Exchange-Traded Fund (ETF) can be a strategic choice for diversifying your portfolio. However, what happens when you are suddenly faced with the termination of an ETF you are invested in? This situation can cause anxiety, but with informed decision-making, you can navigate the situation effectively.

The Reason for ETF Termination

When an ETF is terminated, it essentially means the fund is being dissolved. There are several reasons why an ETF might be terminated:

Low Holdership: The ETF may not have enough investors to maintain its operations. Non-Competitive: The ETF might be underperforming compared to similar funds. Regulatory Changes: New regulatory requirements may make the ETF unfeasible to operate. Administrative Decisions: The fund's administrator may decide to close it due to administrative reasons.

What Happens During Termination?

During the termination process, what exactly happens to your investment can vary depending on the ETF's terms and specific circumstances. Here are the key points to understand:

Price Stability During Expiry

Typically, the ETF issuer will ensure that the share price remains stable during the termination period. This is because the fund maintains the value of the stocks or cash it holds. Therefore, the price of the ETF is unlikely to crash as a result of a rush to sell. There is a mechanism in place that keeps the share price tightly aligned with the fund’s Net Asset Value (NAV).

Potential Re-Investment Options

When one of your ETFs is being terminated, you may have the option to be offered a different ETF that is nearly identical to the one being terminated. In many cases, your funds are automatically transferred to this new ETF. However, if no such option is available, your funds might be deposited into a savings account, waiting for your direction regarding reinvestment.

Immediate Action is Key

While price stability is a reassuring feature, it is not a reason to hold onto the ETF until the last possible moment. It would make more sense to close your position and invest in something else. This action aligns with sound financial practices and allows you to maintain control over your assets during uncertain times.

Do You Sell or Hold?

Determining whether to sell or hold on to an ETF that is about to terminate requires careful consideration. Here are some factors to weigh:

Sell and Reinvest in a Better Perception Fund

If you are offered a new ETF that closely mimics the one being terminated, it might be wiser to close your position and reinvest in the newer, potentially more successful ETF. This decision could offer a better investment opportunity and align with your long-term financial goals.

Diversification and Alternative Investment Options

Consider diversification by looking at alternative ETFs that have shown resilience in recent market conditions. For instance, if tech growth stocks have been struggling, you might want to consider ETFs managed by successful funds, like those from Cathie Wood, specifically ARK ETFs (ARKK, ARKW, ARKF). These ETFs have shown promising performance in certain market trends.

A Long-Term View with Direxion 3x ETFs

For a longer-term hold, you might consider Direxion 3x ETFs (SPXL, TECL). These ETFs are designed to outperform the SP 500 and the tech sector, respectively, by three times the daily percentage gain. If you're optimistic about an upcoming uptrend, these may be suitable choices for swing trading or longer-term holding.

Reflect on Your Mistake

When you find yourself in the position of having to terminate an ETF, it might be indicative of a mistake in your investment strategy. It’s important to reflect on this mistake objectively, as if you did not know yourself, to ensure it never happens again. Here’s how you can approach this:

Immediate Action by Selling

The first step is to sell the fund as soon as possible to minimize any potential losses or to lock in any gains you have realized.

Learn from Your Mistake

Take this opportunity to understand why the ETF underperformed. Was it due to market conditions, management issues, or a lack of diversification? These insights can help you avoid similar mistakes in the future.

Revisit Your Investment Strategy

Reconsider your overall investment strategy. Are there better sectors or funds that align with your investment goals and market outlook? Adjusting your strategy can be crucial in achieving your financial objectives.

Conclusion

The termination of an ETF can be unsettling, but it also presents an opportunity to reassess and improve your investment strategy. Whether you choose to reinvest in an alternative ETF or take a different approach, the key is to act swiftly and make informed decisions. Remember, hindsight is 20/20; learn from your mistakes and move forward with a well-thought-out plan for your investments.