With countless ETFs struggling to gain traction among investors and generate consistent trading volumes, many analysts have predicted that the industry will witness a wave of fund closures in 2010 (we’ve already seen more than 20). But the Claymore/Delta Global Shipping ETF (SEA), which recently has about $150 million in assets and average daily trading volume of almost 200,000 shares, certainly wasn’t one one of the products expected to shut its doors. So news this week that trading in SEA would halt shocked a lot of investors, especially those invested in the shipping ETF.
But SEA’s shuttering wasn’t related to lack of demand in the product, but rather some unique administrative hurdles that has the Claymore team jumping through a few hoops to get continue to offer exposure to the shipping sector.
As a result of its acquisition by Guggenheim in late 2009, the existing investment advisory agreements for Claymore’s ETFs were terminated, and shareholders were asked to approve new agreements as a result of the change in control. New agreements for most of Claymore’s ETFs and CEFs were readily approved by shareholders. But although more than 90% of shareholders voting on the new SEA agreement, the company was unable to reach a quorum during the allowable period. “Despite significant undertakings to secure the needed proxies during the allowable period, we were not able to obtain sufficient shareholder participation,” commented William H. Belden, Managing Director, Claymore Securities, Inc. “The Fund’s significant non-U.S. shareholder presence plus the large number of shares held anonymously made it difficult to solicit shareholder consent.”
So SEA closed to new investments and halted trading before the open of the markets on April 28th. All shareholders remaining on that date received a cash distribution which represented the final value of the fund’s shares, which included any capital gains and dividends. But the shipping ETF isn’t sunk for good. Noting that the asset levels and trading volumes clearly indicate significant investor interest, Claymore is taking steps to launch a new ETF trading under the same name and symbol and following the same index, the Delta Global Shipping Index (see SEA: The Closest Thing We Have To A Greece ETF).
This course of action isn’t completely unprecedented. As a result of its acquisition by BlackRock, existing investment advisory agreements for iShares products terminated in December 2009 and approval of new agreements required shareholder action. Shareholders voted to approve new agreements for most of the iShares ETFs, but the company encountered difficulties securing sufficient participation for 12 ETFs with aggregate assets of almost $30 billion, including the $11 billion MSCI Brazil Index Fund (EWZ) and 11 more ETFs with at least $80 million in assets. Of the 12 ETFs in danger of closing due to lack of shareholder participation, 11 had an international or global focus (the Dow Jones U.S. Medical Devices Index Fund was the other). iShares ultimately received enough votes to approve the new agreements and keep the ETFs running.
The lesson from all of this? Don’t throw those proxy statements in the trash. Take the time to vote when requested to do so, even if approval of the issue at hand seems like a foregone conclusion.
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Disclosure: no positions at time of writing.