What happens if the liquidity in an ETF dries up over the Years or the AMC decides to end the ETF all together or AMC goes under? What will happen to my investment in these cases.
What happens if the liquidity in an ETF dries up over the Years or the AMC decides to end the ETF all together or AMC goes under?
This post on @smallcase blog explains how liquidity can be created in a ETF if the AMC wants it -
But I understand your point, as many ETFs have very low volumes on the exchanges (Looking at market data for ETFs on the NSE website). Also, there have been instances when Market Makers have stepped away from creating liquidity when the markets became volatile causing the ETF prices to become out of sync with the respective ETF’s NAV -
Also, there have instances when ETFs (particularly Gold ETFs) have traded at a premium to their NAVs due to demand/supply problems -
In such cases, the investor can directly approach the fund house to which the ETF belongs to redeem their investment. As fund houses always have the underlying stocks/assets for the ETF, they can sell it in the market to meet the redemption pressure. There are certain limitations when following this method, like transactions can only happen in creation unit size (To give an example, the creation unit size of NiftyBees is 50,000 units of that ETF). Also, some AMCs allow direct redemption in sizes lower than the creation unit size if certain conditions are met (like for example ICICI Prudential AMC)
Canara Robeco Gold ETF was an ETF that was discontinued. In that particular case, the fund house (Canara Robeco Mutual Fund) decided to merge it with another scheme of theirs called Canara Robeco Savings Fund (aka all ETF unitholders got units of the other scheme allotted to them).
Previously when AMCs have wanted to exit their asset management business, there are always buyers available (An example of this is NiftyBees ETFs. That ETF was started by Benchmark Mutual Fund back in 2001. Then their whole business got sold to Goldman Sachs AMC in 2011. After that, Goldman Sachs AMC sold it to Reliance Capital AMC in 2015. Finally Nippon India bought Reliance Capital stake in 2019 and now manages that asset management business including the NiftyBees ETF).
In the worst-case scenario, if a fund house decides to wind-up an ETF completely, then the investor will likely get back their investment once the fund house sells the underlying stocks/assets. As far as I know, something like this hasn’t happened before in Indian markets (but I might be wrong). But this has happened with many ETFs in the USA -
As far as I know, investment should remain safe as all ETFs hold the underlying stock/asset for the index being tracked by a particular ETF.
Thanks for the extensive answer @Prayag. Cleared my concerns about ETF, specially the liquidation issues.