The ETF market is full of contradictions. Exchange traded products are one of the fastest growing investment vehicles in the market, with dramatic asset growth and a number of new products coming to market. Yet the number of ETPs in the marketplace is decreasing. So far in 2013, there have been 30 fund closures, matching 2011’s annual total and on track to exceed 2012’s record of 94 closures.

Prominent examples include PowerShares, which closed 13 funds, and Guggenheim, which closed nine. And the funds they closed were not all leveraged or inverse funds, on the wrong side of the market. 

Before a fund closes, the authorized participants will focus on more liquid products to capture arbitrage opportunities, which can result in your clients’ position diverging from its NAV (net asset value).  Holders should use limit orders to exit or wait until the fund is actually liquidated, at which point they will receive the full cash value of their shares. Closing funds often face competitive pressures from other products in the same space providing swap opportunities to avoid any unpleasant tracking errors that can accompany liquidation.

ETF Global compiles a monthly Liquidation Watch List of exchange traded products, which will be posted and updated on WealthManagement.com as it comes out. The funds on the list meet criteria that raise their prospects of closure. The first screen eliminates those less than two years old, as a sponsor will usually give a new product at least that amount of time to prove itself. After two years, a fund that has failed to acquire a minimum of $5 million under management becomes eligible for the list. The third criteria is having negative performance for the trailing 12-month period, as sponsors know investors are less likely to allocate to a loser.

This month’s Watch List, available at www.etfg.com or by clicking here, highlights 59 exchange traded products that meet all three criteria which is a bump up from recent months. There are plenty of leveraged and inverse ETNs based on niche markets, which is typical, but there are a few more plain vanilla ETFs tracking sectors of emerging markets like Argentina, Brazil and China. The increasing number of funds falling below the $5 million threshold is also indicative of the consolidation trend in the industry.

That said, inclusion on the list does not guarantee closure and exclusion does not guarantee longevity as various sponsors have different reasons for closing a fund. Some terminate for broader corporate reasons like PowerShares, Guggenheim and Russell last year. Those closures were announced far ahead of time and mostly invested in liquid securities like broad market equities, unlike some other funds that have closed over the years with disruptive spikes in tracking error.

There are other liquidity risks aside from closure. Deutsche Bank had to suspend creation units on 26 ETNs mostly under the PowerShares DB brand resulting from a delay in the filing of their 2012 annual report. The company says it will resume creation units in “due course” but the delay could result in premiums or discounts to NAV until then. A couple of those funds appear on this month’s list, designed to help advisors avoid unpleasant surprises when using esoteric products or seeking exposure to niche markets.

For this month’s ETF Liquidation Watch List, click here