What is Zombie ETF?

558 reads · Last updated: December 5, 2024

A zombie exchange-traded fund (ETF) is no longer growing and attracting money from new investors. When an ETF enters zombie territory, it is usually only a matter of time before it is shut down by the company that issued it.Investors will get their money back, or most of it. However, they may make less than they had hoped, and taxes will be due on any profits they earned from the fund.

Definition

A Zombie Exchange-Traded Fund (ETF) refers to an ETF that is no longer growing or attracting new investors. When an ETF enters the zombie realm, it is usually only a matter of time before the company that issued the fund closes it.

Origin

The concept of Zombie ETFs emerged with the rapid expansion of the ETF market. As more ETFs were launched, some funds failed to attract enough investors, gradually being labeled as Zombie ETFs.

Categories and Features

Zombie ETFs typically exhibit low trading volumes and low assets under management. Their main characteristics include a lack of liquidity and market interest, making it difficult for them to sustain operations. Investors may find these ETFs have wider bid-ask spreads and higher trading costs.

Case Studies

A typical example involves ETFs focused on small or niche markets that may not attract enough investors upon launch, becoming Zombie ETFs. For instance, ETFs targeting specific industries or regions might become Zombie ETFs due to insufficient market interest. Another example is thematic ETFs, such as those focused on specific technologies or trends, which may initially gain attention but lose appeal as market conditions change.

Common Issues

Investors might be concerned about the liquidity issues of Zombie ETFs, as low trading volumes can lead to wider bid-ask spreads. Additionally, the closure of a Zombie ETF might pose tax issues for investors, as they need to pay taxes on any profits earned from the fund.

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