But because I work at an investment firm, I also get questions like, “What’s really going on in Europe? Your dad is concerned.” “Can you explain this number to me?” “Oh, and should I be investing in Facebook? Also, what is Facebook?”
My mom, like many people, knows what she doesn’t know when it comes to her finances. She has worked her whole life for a university, not for an investment bank, and what she thought she understood prior to 2008 doesn’t seem to ring true anymore. And since like others her age, she’s worried about having enough money for retirement, she turns to me when she has a question about this stuff – hoping that because I work in the investment industry, I might have the inside scoop.
So I was thinking. My mom is obviously very special to me, but she’s not special when it comes to the types of financial questions that keep her up at night. I thought I’d answer her latest email to me here on the blog, in case it helps you, too.
How are you?
Two questions RE: our investment account. (I know, I know.) Why are some of these ETFs classified as “equities” on my statement? I thought you said AGG had bonds in it. Ack. Am I thinking of the wrong thing? Also, I saw an article – a few firms just closed their ETFs. How do I know mine aren’t going to close? And what if they did? Do we lose our $? Help your mother, please.
Don’t worry about asking me questions! I’d rather you ask me than not ask at all. It’s important to know what you own, and feel good about it.
So. The answer to your first question. Some brokers do classify bond ETFs as “equities” on account statements. Don’t worry. Bond ETFs (AGG in this case) hold bonds, like you thought. Because ETFs are traded on exchanges, like stocks, they are sometimes classified as stock investments. Just double-check the fund name – it should be clearly labeled “bond” in the name.
Second question. Yes, a few ETF providers announced that they’re closing their doors. Honestly, I think it’s a good question to ask. Typically, ETFs close because they haven’t raised enough assets for the fund provider to justify keeping the fund open. Various commentators like this guy have said that it’s likely that we’ll see more ETF consolidation in the next few years, as the industry matures. With so many ETFs launched so fast, it’s natural that some of them would have been launched without sufficient demand for the product. That’s why it’s important to invest with an ETF provider that you trust and you believe is committed to supporting its products.
But here’s the deal – the vast majority of ETFs should be a-ok. Over $1.7 trillion is invested in ETFs, and from the looks of where the industry is headed, most of them aren’t going anywhere anytime soon.
What’s most important to know is that if your ETF does close, it shouldn’t leave you high and dry. ETFs are baskets of securities, just like mutual funds. The thing that tends to trip people up is that, unlike mutual funds, ETFs are traded on an exchange. People worry that when an ETF closes, investors might run toward the exits and drive the price of the ETF down.
While it’s possible that there may be some price changes as fewer folks want to buy shares of the ETF itself, the key is that the ETF generally reflects the value of the stocks it holds. That means if you hold the ETF all the way to the last day of trading, you’d receive the value of the underlying shares at that moment in time. If you want to sell the ETF prior to the last day of trading, it could make sense to execute what’s called a limit order (which would help guard against any possible shift in demand for the ETF itself).
Now, there are some other things to be aware of when it comes to an ETF closing – perhaps most important is the fact that you may owe taxes if your investment is liquidated at a net gain. You should always consult with a tax attorney if you find yourself in this situation. But the main point here is that ETF closures are generally rare, and not as damaging as you may imagine them to be.
I hope that helps!