Presidential Election Reflection
Another election day has passed. It is hard to know what will happen between now and the inauguration, let alone what awaits us beyond.
What happens when a mutual fund or ETF becomes obsolete? The most common and straightforward outcome is a liquidation in which the fund’s assets are sold and distributed to investors (with a potential tax bill!). Funds can also be merged. In this scenario, the fund’s assets are transferred to another fund from the same company, and the investor receives shares of the new fund. About 22% of fund closures over the past 10 years were mergers. (1)
Mergers share one trait with liquidations. They tend to be preceded by poor performance. And the rate of underperformance has been similar for both groups, with nearly two-thirds underperforming their category averages prior to their obsolete date.
Another drawback with fund mergers is the potential to end up with a radically different investment proposition than what you originally bought. That is because there is no rule dictating preservation of the investment objective in the merger. Exhibit 1 shows some examples of investment style transitions from mergers over the past 10 years.
For investors who have thoughtfully crafted an asset allocation, a fund merger may be just as undesirable as a straight liquidation. Investors can mitigate the possibility of landing in this scenario by selecting mutual funds and ETFs from managers with a history of long-running strategies and low attrition rates.
This article originally appeared in Above the Fray, a weekly newsletter for Dimensional clients.
FOOTNOTE
(1) This and all fund closure stats are based on data from Morningstar for the period January 2014 to December 2023. Includes all US-domiciled mutual funds and ETFs.
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Another election day has passed. It is hard to know what will happen between now and the inauguration, let alone what awaits us beyond.
Let’s contemplate some of the tried-and-true steps to help better prepare your financial affairs for when disaster strikes.
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