Why ETFs Close

Includes: ALT
by: Tom Lydon

The news of BlackRock shutting down one of its exchange traded funds is just a normal part of a maturing and consolidating ETF business. But it does bring into focus what happens for investors when a provider shuts down a fund.

BlackRock iShares is the largest ETF provider by assets under management. There are currently 290 ETFs in the line-up and soon it will consist of 289, as the provider is shutting down its first ETF since 2002, reports Aaron Levitt for Investorplace.

The iShares Diversified Alternatives Trust (NYSEARCA:ALT) is an active ETF that held managed futures, and it simply was not attracting enough investor interest.

The ETF industry has been undergoing an evolution of sorts, as the weak or niche ETFs, those that have failed to attract enough assets under management, are closing down. In 2012, 94 ETFs closed up shop, the most ever recorded. In the long run, ETF closures are natural and helpful to investors, as underperforming funds get picked up and successful strategies survive.

ETF providers shutter a fund when it fails to gain enough assets under management. For one, it can become unprofitable to keep a fund in existence if asset levels aren't high enough, and if the issuer does not have enough strength. A fund can also shut down if it tracks a niche area of the market that fails to attract enough investor interest.

Among the active ETF industry, some say that "survivorship bias" is a problem that could result from such a fund closing. By closing down a lagging ETF and keeping the winning ETF trading, the track record of the active manager can become falsely bolstered by the winning performance, reports Ian Salisbury for The WSJ.

Basically, closing down a losing fund is a business decision and there is no intention of enhancing manager performance, or track records. The end result is getting the best possible product out to the investor and eliminating the unnecessary.

Tisha Guerrero contributed to this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.