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Tuesday, December 1, 2009

Portfolio Management on ETF Liquidation

Liquidation of exchange traded funds is now almost common. The influx of a high number of ETFs tracking narrow sectors or with high expense ratios has severely affected the survivability of many of them. Here are some tips for getting through ETF liquidation.
  • The first thing is 'Panicking'. ETF liquidation does not mean any significant capital loss. You can still get all (most) of your invested money by selling the shares before stop-trading date or by holding them to receive payment.
  • The really adverse effects of ETF liquidation are the possible creation of a tax event and the possible need of redefining the long-term investment goals.
  • Traders can minimize the chance of liquidation by investing in the right ETFs.
  • Traders can avoid ETFs tracking narrow segments, having very low daily trading volume, having low asset value (say below 10 M), having very high expense ratios, etc.
  • When investing in an ETF know its risks and rewards. The things to look for include fees, expense ratio, type of index tracking, investment strategies, past performance, etc.
  • Investors with long-term goals should avoid ETFs capitalizing on short-term booms and trends.
  • Like with any other investment, diversifying your portfolio can always help you.
ETFs are still very good investment instruments, especially for those with low investing knowledge and time but want to profit from market performances. Liquidation of more numbers of ETFs can’t be taken as a drop of the entire industry; it is just a rearrangement and survival of the fittest.

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posted by NobleTrading at 10:51 AM

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