Fund manager PIMCO has said that it will be closing down two of its ETFs, with both funds being liquidated after trading on 31 March. The funds, PIMCO Diversified Income and PIMCO Global Advantage Inflation-Linked Bond Active will be shuttered as part of what the California-based fund manager is calling a routine procedure.
No further investment will be accepted into the funds from the end of March, and the ETFs will be liquidated from 7 April, with money returned to investors. PIMCO says that there can be no assurance that there will be a market for the purchase or sale of units in the funds between the end of trading March 31 and the liquidation date.
Any shares of the two funds that are still outstanding on the liquidation will be automatically redeemed without transaction fees and settled according to normal prevailing settlement times. Investors may instead choose to sell their shares prior to 31 March, although this will be subject to transaction fees, PIMCO said this morning.
Why do fund managers close ETFs?
There are a number of reasons why fund managers will close an ETF. Bear in mind that the ETF market is wider and more variable than ever, and investors have a wide range of ETFs to choose from. It is very hard for asset managers to compete in the ways they might do with active funds, as an ETF should really be focused on tracking the index it follows as closely as possible.
Because of the lower fees that ETFs charge, they need to be fairly large to actually make a profit. Once an ETF falls below a certain level of AuM, they stop being cost-effective. Institutional investors play a big role in this market, and a smaller ETF will be less attractive to the big money – banks and pension funds worry about their ability to exit a fund where they represent a large part of the investor base. Redeeming $5000 is one thing, redeeming $50 million is something entirely different.
There can be a range of reasons which ETFs do not succeed – generally it is because there is little interest on the part of investors in that market or the way the ETF approaches the market. As mentioned above, bigger, liquid ETFs that are doing to job in delivering exposure with competitive fees will draw the most interest. First mover advantage is still significant in this market.
If a market is doing badly, of course, the ETF manager is still obliged to track it. Investors may redeem to the point where an ETF becomes untenable. That is no fault of the fund manager, just that interest in investing in the market has dried up.