Zombie ETF
Candlefocus EditorThe decisions to discontinue an ETF hinge on assets and liquidity. An ETF most likely won’t gain from economies of scale if its assets are low or if there’s not enough liquidity to make it cost-effective to keep trading. Investors who hold zombie ETFs may experience a capital gain and be subject to the resulting taxes.
The process for liquidating a zombie ETF depends on the issuer. Generally, the shares are exchanged for a combination of cash and/or an in-kind exchange of securities. In this case, shareholders will receive cash and/or an in-kind exchange of securities such as stocks and bonds. This allows investors to get out of the failing fund and buy into something new.
The main risk associated with a zombie ETF is the tax implications when investors are cashed out. They may be hit with a substantial bill if they experience a capital gain. However, some zombie funds may have a low basis when they disappear, meaning investors might not owe taxes on their gains. They should consider a zombie fund’s tax status before investing.
Zombie ETFs can be avoided by researching the funds before investing, sticking with well-known ETFs with liquidity, and analyzing fund performance before committing money. Be sure to always consult a financial advisor before investing.