Heading in to 2011, many had predicted that a wave of closures would sweep over the ETF industry, the result of overly ambitious growth in recent years and the introduction of increasingly targeted exchange-traded products. Through the first five months of the year, however, only a leveraged Barclays ETN, BXDD, shut its doors–and that shuttering was the result of an automatic redemption related to a certain minimum price threshold, as opposed to a discretionary closing. The ETF industry has expanded at a breakneck pace in 2011, with more than 80 new ETPs making their debut. And though the industry remains top-heavy–more than 550 ETFs have less than $50 million in AUM–few have pulled the plug.
But now the next round of ETF casualties are upon us; FaithShares will be adding four ETFs to the list of the deceased in the coming weeks, as the Oklahoma-based issuer closes all but one of its unique faith-based exchange traded products [see also How To Survive An ETF Liquidation].
In an SEC filing FaithShares reflected on the decision to close down the four funds. “After careful consideration, the Board of Trustees of the FaithShares Trust has determined to close and liquidate the FaithShares Baptist Values Fund, the FaithShares Catholic Values Fund, the FaithShares Lutheran Values Fund and the FaithShares Methodist Values Fund,” said the filing. The last day of trading for each of those four funds will be July 15; between July 20 and July 27 the funds will liquidate their holdings, and shareholders remaining as of July 27 will have their shares automatically redeemed for a cash payment.
FaithShares hit the scene in 2009 with a unique take on investing, offering funds that matched the values of some of the most popular Christian denominations in the country, including Baptist, Methodist, and Catholic. These products were defined not by what companies they included–exposure is generally broad-based in nature and includes well known names–but by what they avoided. The underlying indexes avoid companies engaged in activities deemed to be inconsistent with the beliefs of each denomination, such as abortion, alcohol, contraceptives, firearms, gambling, nuclear power, pornography, stem cell research, and tobacco [see a complete matrix of the excluded operations].
Despite being the only faith-based ETFs on the market, the FaithShares funds have struggled to gain traction with investors. Part of struggle may be related to the relatively hefty expense ratios; each FaithShares ETF charges 0.87%, or more than 80 basis points more than some of the cheapest ETFs. The funds closing down next month include:
- FaithShares Catholic Values ETF (FCV): This product was designed to track a benchmark that measured the performance of U.S. large capitalization companies that operate in accordance with the U.S. Conference of Catholic Bishops’ Socially Responsible Investment Guidelines.
- FaithShares Methodist Values ETF (FMV): This ETF seeks to replicate the FaithShares Methodist Values Index, which consists companies that operate in accordance with the investment philosophy of the United Methodist Church. FMV has about $1.5 million in AUM.
- FaithShares Baptist Values Fund (FZB): FZB is linked to an index that is maintained in accordance with the guidelines for social screening recommended by various Baptist denominations. There are some 16 million Southern Baptists in the U.S., but apparently few of them have much interest in ETFs; FZB has AUM of only about $1.5 million in assets and an average volume under 1,000 shares.
- FaithShares Lutheran Values Fund (FKL): This fund holds companies that operate in accordance with the guidelines for social investing and shareholder advocacy recommended by various Lutheran denominations. In particular, this index avoided companies involved in certain harmful products and services, nuclear military weaponry, and hazardous environmental impact.
The company will still keep its broad-based FaithShares Christian Values ETF (FOC), which currently has about $3 million in assets. This product aims to incorporate all Christian values into its investment thesis, avoiding companies involved in abortion, stem cells, and alcohol.
Tips For ETF Closures
The closing of an ETF is obviously less-than-ideal for those investors with positions in the fund. The automatic redemption may lead to an unwanted tax event, potentially triggering capital gains that ETFs are generally efficient at avoiding. But it’s important to avoid panic selling that may incur indirect costs (such as execution at a discount to NAV. “Trying to get out of a big position as soon as a liquidation is announced, if not done properly, can backfire,” said Paul Weisbruch in an interview with ETFdb. “A lack of understanding of the liquidation process can lead to reckless trading, which in turn can lead to bad experiences and skepticism over the efficiency of the exchange-traded structure.”
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Disclosure: No positions at time of writing.
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