ETF Delisting

ETF (Exchange Traded Fund, Index Stock Fund) is an open-end fund issued by an investment trust company that tracks, simulates or replicates the performance of the underlying index and is listed and traded on the stock exchange. ETFs have the characteristics of both open-end funds and stocks. After listing, they can be subscribed or bought back in the primary market. They can also place orders with securities firms at any time during the intraday trading hours of the secondary market.

Since its launch in 1989, ETFs have become one of the most popular investment vehicles today. In the United States, about 200 new ETFs are launched every year. However, between 2017 and 2019, at least more than 150 ETFs were also delisted. What are the reasons for ETF liquidation (liqidation) or delisting (delisting or closure)? What investors are most concerned about is whether there will be losses if the ETF is delisted?

Why are ETFs delisted?

Whether in Taiwan or the United States, there are two main reasons for ETF delisting:

Reason 1 for ETF delisting: asset size is too small

Some ETFs may have too narrow investment scope or lack of investor interest, causing the scale of assets under management to be too small. Issuers cannot make profits and will be delisted. For example, according to the regulations of the Taiwan Securities and Futures Bureau, if the average ETF size is less than NT$100 million, then it must be delisted.

This is actually easy to understand. The reason is that ETFs have expense rates. If we look at the general expense rate of 0.5%, the issuer will only earn 500,000 yuan per year for assets of 100 million yuan, which is not even enough to pay a fund manager’s salary. Then the company must be losing money.

For example: Fubon Development (0058), Fubon Financial (0059), and FH American Financial Stock (00767) have all been delisted due to low long-term scale.

Reason 2 for ETF delisting: Net value dropped too much

If the net value of an ETF drops too much from the issue price, that is to say, investors lose too much, it may be delisted. For example, according to the regulations of the Taiwan Securities and Futures Bureau, if the average net value of the past three business days falls from the issue price, 90%, if the ETF delisting rules are met, it must be delisted.

For example: The most famous example is Yuanta S&P Crude Oil Positive 2 (00672L). When oil prices plummeted in March 2020, its average net value in the past three business days fell 90% from the issue price, and its net value was the lowest in April. At that time, there was even only 0.49 left.

However, at that time, the Financial Supervisory Commission suddenly announced an exemption clause, stating that before September 30 of that year, if the net value of the fund fluctuates significantly due to changes in domestic and foreign economic and financial conditions, and meets the 2 conditions, it will be exempted from the liquidation threshold after approval limits.

Because the standard of nearly 3 business days was relaxed to nearly 30 business days, Yuanta Crude Oil was temporarily exempted from the crisis of delisting. However, as of August of the same year, the net value of the ETF had not exceeded 1 yuan. Therefore, Yuanta Investment Trust also issued an announcement that if the average unit net value in the 30 business days from 8/19 to 9/30 was less than 2 yuan, Yuanta would Delist this ETF.

What is the process for delisting an ETF?

Liquidated ETFs must follow a strict liquidation process. The liquidation of ETFs is similar to the liquidation of investment companies, except that the ETF needs to notify its exchange that it is about to stop trading, and ETF holders usually notify the exchange one week to one month before the situation occurs. received a liquidation notice.

After its exchange agrees to delist, the stock exchange will announce the suspension of trading and liquidate the net asset value of the fund. Finally, ETF holders will be able to get back the liquidated amount. Therefore, it will not be like losing all the money when the stock is delisted. However, if the funds are returned to the taxable account, there may be taxes, forcing investors to pay capital gains tax.

What will happen if the ETF is delisted?

ETFs are different from stocks. When stocks are delisted, they will become wallpapers. However, ETFs will be settled based on the net value (NAV) before they are delisted. Therefore, investors will not suffer losses, but there may be taxes and reinvestment risks.

When the funds are returned to a taxable account, investors may be forced to pay capital gains tax. In addition, investors need to arrange where the funds are to be returned, and there is a risk of reinvestment.

Although the delisting of ETFs will not cause losses to investors, it is more troublesome after all. Trading must be stopped for a period of time, and the money returned after liquidation may also have tax issues and reinvestment risks.

So how can we try to avoid picking ETFs that will be delisted? You can refer to the following methods:

Avoid ETFs with too small asset size

Asset size refers to the total asset value managed by an ETF. Generally speaking, the larger the asset size, the more popular the ETF is with investors and the more likely it is to make a profit. On the other hand, ETFs with too small asset sizes may face the risk of being delisted due to lack of market attention or liquidity.

Therefore, when choosing an ETF, you can refer to its asset size to avoid picking an ETF that may be delisted. Generally speaking, ETFs with assets exceeding 1 billion yuan are considered a safer choice³.

To check the asset size of an ETF, you can use the following methods:

Go directly to the official website of the investment company or ETF issuer to check

Use the "Fund Net Value Inquiry System" provided by the stock exchange to inquire

Use third-party platforms such as Duyu, Heri, etc. to query

Avoid ETFs whose net worth drops too much

Net value decline refers to the change ratio between the ETF's unit net value and the issue price. If the net value declines too much, it means that the ETF's investment performance is poor and may also trigger the threshold for delisting. For example, the Taiwan Securities and Futures Bureau stipulates that if the average net value of the last three business days falls by 90% compared with the issue price, it must be delisted.

Therefore, when choosing an ETF, you can refer to the size of its net value decline to avoid picking an ETF that may be delisted. Generally speaking, ETFs whose net value falls within 10% are considered safer choices.

Avoid ETFs with too low trading volume

Trading volume refers to the number of units of an ETF traded within a certain period of time. Generally speaking, the higher the trading volume, the more liquid the ETF is and the easier it is to buy and sell. On the other hand, ETFs with too low trading volume may face the risk of being delisted due to lack of market activity or demand.

Therefore, when choosing an ETF, you can refer to its trading volume to avoid picking an ETF that may be delisted. Generally speaking, ETFs with a daily trading volume of more than 1,000 contracts (100,000 units) are considered safer choices.

To check the trading volume of ETFs, you can use the following methods:

Go directly to the official website of the investment company or ETF issuer to check

Use the "Fund Daily Trading Volume" provided by the stock exchange to query

Use third-party platforms such as Duyu, Heri, etc. to query

Conclusion

This article introduces what ETF delisting is and the reasons, processes and impacts of delisting. We also provide three methods to avoid picking ETFs that will be delisted: avoid ETFs with too small asset size, too large a drop in net value, and too low trading volume. Hopefully this article will help you make more informed and safer decisions when investing in ETFs.