Everybody knows starting a restaurant is a risky business. But most investors may not realize that cooking up a new exchange-traded fund recipe has a surprisingly high failure rate as well. And that can cause some unpleasant surprises for investors who’ve bought shares in funds that shut down. When funds liquidate, they distribute the cash value of their holdings to investors, potentially triggering unplanned-for taxable capital gains or losses.
Fortunately, investors who stick with large, broadly diversified ETFs generally don’t have to worry about closures, says Daniel Sotiroff, a senior analyst for investment research firm Morningstar. Likewise, limiting investments in risky ETFs to tax-deferred accounts will eliminate closure-related tax headaches.
