I had the unfortunate experience quite recently of being forced to sell at a low my ESR:US etf (iShares MSCI Emerging Markets Eastern European Index Fund) , because it was about to close down. As a result I am very wary about ETFs generally for the risk of closure at market lows. I hope to have your comment on these things : (1) Are ETF closures fairly common? (2) How about the closure risk of mutual funds and closed-end funds? (3) Do you thinks that closed-end funds give better long-term returns than managed funds (assuming all other factors the same)?

David Fuller's view

I am sorry to hear of your forced sale of an ETF at the recent market lows, all the more frustrating because this sounds like a classic contrary indicator.  However, thank you for your email because you have asked some important questions of general interest to most subscribers.

Eoin and I have strong views on this subject.  He mentions the big proliferation of ETFs over the last fifteen years or more, which has often been led by marketing people.  In their effort to get on board with a new asset category, too many ETF providers have moved into niche markets which may not be about to become popular.  Moreover, if they fall out of favour and lose investors, they can quickly become illiquid and also unprofitable due to their low charges, resulting in closures such as you experienced.  

Therefore in answer to your specific questions: 1) ETF closures in thin, somewhat esoteric markets are definitely a risk.  I would avoid these and only consider ETFs in large, liquid markets, such as the Nasdaq 100, which they should be able to track reasonably effectively.  However, too much hedging or trading with ETFs can lead to market accidents, as apparently occurred on 24^th August.  2) Mutual funds generally have higher fees than closed-end (investment trusts), so there are more of them and my guess is that mutual funds have a higher closure rate.  3) Generally higher fees would work against mutual fund performance relative to closed-end funds (investment trusts), which incidentally are also managed.  However, the key variable will be the managers’ skills.  Additionally, mutual funds will have to liquidate positions in a market downturn, if significant holders are cashing out.  This may not happen in closed-end / ITs, because investors buy them on the stock market.  Therefore, the price will move to a bigger discount to NAV in a downturn, and occasionally to a premium in bull trends.  Happiness in closed-end / ITs for long-term contrarian or value investors is a big discount to NAV in an oversold sector.