Can you liquidate an ETF?
ETFs may close due to lack of investor interest or poor returns. For investors, the easiest way to exit an ETF investment is to sell it on the open market. Liquidation of ETFs is strictly regulated; when an ETF closes, any remaining shareholders will receive a payout based on what they had invested in the ETF.
ETF trading generally occurs in-kind, meaning they are not redeemed for cash. Mutual fund shares can be redeemed for money at the fund's net asset value for that day. Stocks are bought and sold using cash.
You'll typically pay a commission each time you buy or sell an ETF—but not always.
In-Kind Creation and Redemption vs Cash Redemption
This mechanism also facilitates the arbitrage process, helping to maintain the ETF's market price close to its NAV. Conversely, cash redemption involves the exchange of ETF shares for cash, potentially resulting in tax implications and increased trading costs.
ETFs have differing liquidity profiles for many reasons. Investing in an ETF with relatively low liquidity may cost you in terms of a wider bid-ask spread, reduced opportunity to trade profitably, and—in extreme cases—an inability to withdraw funds in certain situations like a big market crash.
Since ETFs are traded on the stock exchange, they can be bought and sold at any time during market hours like a stock. This is known as 'real time pricing'. In contrast, mutual funds can be bought and redeemed only at the relevant NAV; the NAV is declared only once at the end of the day.
Cessation of employment is compulsory if a withdrawal claim is to be made. Reason for cessation could be retirement, resignation, dismissal, vacation of post, etc. A member is not entitled to make a second / subsequent claim until lapse of 5 years from the date of previous withdrawal of fund balance.
Liquidate immediately: Selling your shares before the closure date allows you to reinvest the principal more quickly, since the standard settlement for ETFs traded on national exchanges is just two business days.
Just as with individual securities, when you sell shares of a mutual fund or ETF (exchange-traded fund) for a profit, you'll owe taxes on that "realized gain." But you may also owe taxes if the fund realizes a gain by selling a security for more than the original purchase price—even if you haven't sold any shares.
Key Takeaways
For most ETFs, selling after less than a year is taxed as a short-term capital gain. ETFs held for longer than a year are taxed as long-term gains. If you sell an ETF, and buy the same (or a substantially similar) ETF after less than 30 days, you may be subject to the wash sale rule.
How do I cash out my Vanguard ETF?
To withdraw money from your Vanguard Cash Account log in to Vanguard Online, select your account, then choose 'Cash' from the menu. You'll be able to see your Vanguard Cash Account balance as well as have the option to withdraw to your linked bank account.
Watch the wash sale rule
The tax law does not define substantially identical security, but it's clear that buying and selling the same security meets the definition. For example, if you sell shares in the XYZ ETF at a loss and buy it back within the wash sale period, you cannot take the loss now.
You can also choose to withdraw when you sell your holdings if you have a nominated and verified bank account. You'll need to send us a secure message, including the amount you want to withdraw. We'll do the rest for you.
Market risk
The single biggest risk in ETFs is market risk. Like a mutual fund or a closed-end fund, ETFs are only an investment vehicle—a wrapper for their underlying investment. So if you buy an S&P 500 ETF and the S&P 500 goes down 50%, nothing about how cheap, tax efficient, or transparent an ETF is will help you.
Investors who hold ETFs that are not liquid may have trouble selling them at the price they want or in the time frame necessary. Moreover, if an ETF invests in illiquid shares or uses leverage, the market price of the ETF may fall dramatically below the fund's NAV.
Interest rate changes are the primary culprit when bond exchange-traded funds (ETFs) lose value. As interest rates rise, the prices of existing bonds fall, which impacts the value of the ETFs holding these assets.
Disadvantages of ETFs. Although ETFs are generally cheaper than other lower-risk investment options (such as mutual funds) they are not free. ETFs are traded on the stock exchange like an individual stock, which means that investors may have to pay a real or virtual broker in order to facilitate the trade.
Market orders are the simplest and represent the default order at most brokerages. It is simply an order to buy or sell an ETF at the best available price in the market at that moment. Pro: You can buy or sell as quickly as possible, because market orders prioritize speed of execution.
Every quarter or every 6 months when you receive your dividend payment, just log into your broker account and sell off a small number of shares in your ETFs to access extra cash. That is the right time to sell your ETFs.
The rule mandates that an investor cannot claim a loss on the sale of an investment and then buy a “substantially identical” security for the period beginning 30 days before and ending 30 days after the sale.
Is it OK to hold ETF long term?
Nearly all leveraged ETFs come with a prominent warning in their prospectus: they are not designed for long-term holding. The combination of leverage, market volatility, and an unfavorable sequence of returns can lead to disastrous outcomes.
Hypothetically: Yes. Practically: No. ETFs are stocks which derive their values from the underlying stocks of net assets of an investment. These investments are not guaranteed and as such could ALL go to $0 in which your NAV would be $0.
For most standard, unleveraged ETFs that track an index, the maximum you can theoretically lose is the amount you invested, driving your investment value to zero. However, it's rare for broad-market ETFs to go to zero unless the entire market or sector it tracks collapses entirely.
An ETF follows a particular index and the securities are present at the same weight in it. So, it can be zero when all the securities go to zero.
A leveraged ETF is a fund that uses financial derivatives and debt to amplify the returns of an underlying index. Certain double or triple-leveraged ETFs can lose more than double or triple the value change of the tracked index. Therefore, these types of speculative investments need to be carefully evaluated.
References
- https://www.fidelity.com/learning-center/trading-investing/trading/trading-differences-mutual-funds-stocks-etfs
- https://www.fool.com/terms/e/etf-expense-ratio/
- https://www.investopedia.com/articles/exchangetradedfunds/09/etf-out-of-business.asp
- https://www.investopedia.com/terms/e/etf.asp
- https://finance.yahoo.com/news/much-cash-withdraw-bank-140036657.html
- https://www.fool.com/the-ascent/buying-stocks/how-to-withdraw-money-from-brokerage-account/
- https://www.quora.com/Will-the-price-of-a-leveraged-ETF-ever-go-negative-What-happens-if-I-invest-100-into-a-3X-leveraged-S-P-500-ETF-over-a-period-of-time-that-sees-a-40-drop-in-value-of-the-S-P-500-Index
- https://www.quora.com/Ever-since-I-started-trading-investment-why-can-t-I-make-a-withdrawal
- https://www.investopedia.com/terms/r/redemptionfee.asp
- https://www.dummies.com/article/business-careers-money/personal-finance/investing/investment-vehicles/etfs/investing-in-etfs-for-dummies-cheat-sheet-207441/
- https://www.quora.com/Do-I-own-the-stock-in-an-index-If-not-why-do-people-buy-indexes
- https://www.schwab.com/learn/story/generating-income-with-etfs-what-you-need-to-know
- https://www.investopedia.com/articles/investing/120415/how-dividendpaying-etfs-work.asp
- https://www.quora.com/What-happens-to-your-ETFs-if-your-ETF-invested-company-goes-bankrupt-Do-you-lose-all-your-money-invested-in-your-ETFs-to-the-company-s-bankruptcy
- https://www.fidelity.com/why-fidelity/pricing-fees
- https://www.thestreet.com/etffocus/trade-ideas/the-only-leveraged-etf-that-i-would-buy-hold-long-term
- https://www.schwab.com/learn/story/etfs-and-taxes-what-you-need-to-know
- https://www.investopedia.com/financial-edge/0711/how-to-double-your-money-every-6-years.aspx
- https://smartasset.com/taxes/how-does-irs-verify-cost-basis
- https://www.fidelity.com/learning-center/investment-products/etf/dividends-on-etfs
- https://www.vanguard.com.au/personal/learn/how-to-guides/cash-account
- https://www.morningstar.co.uk/uk/news/246475/etfs-and-tax-what-you-need-to-know.aspx
- https://etfb.lk/statutory-benefits/
- https://brokerchooser.com/broker-reviews/vanguard-review/how-to-withdraw-on-vanguard
- https://investor.vanguard.com/investor-resources-education/taxes/tax-saving-investments
- https://www.amfiindia.com/investor-corner/investor-center/How-to-withdraw-your-money-in-a-MF.html
- https://investor.vanguard.com/investor-resources-education/etfs/what-is-an-etf
- https://www.schwab.com/learn/story/primer-on-wash-sales
- https://community.hmrc.gov.uk/customerforums/sa/d3e3cb5c-a662-ee11-a81c-0022480003c7
- https://investor.vanguard.com/investor-resources-education/taxes/investment-income
- https://www.morningstar.hk/hk/news/119201/four-simple-rules-when-buying-(or-selling)-an-etf.aspx
- https://www.rbcgam.com/en/ca/learn-plan/types-of-investments/how-to-purchase-and-sell-your-etfs/detail
- https://www.fool.com/investing/how-to-invest/index-funds/dividends/
- https://www.bankrate.com/investing/when-to-sell-stock/
- https://www.investopedia.com/taxes/capital-gains-tax-101/
- https://www.fool.com/retirement/2023/05/12/retire-a-millionaire-with-index-funds/
- https://www.americancentury.com/insights/understanding-tax-efficiency-etfs/
- https://tradingqna.com/t/can-etf-become-zero/131741
- https://www.bankrate.com/investing/stocks-vs-etfs/
- https://www.nerdwallet.com/article/investing/how-to-invest-in-index-funds
- https://support.wealthfront.com/hc/en-us/articles/209358506-How-long-does-it-take-to-withdraw-funds-from-my-Automated-Investing-Account
- https://www.amfiindia.com/investor-corner/knowledge-center/etf.html
- https://www.fpmarkets.com/education/trading-tips/when-should-i-sell-an-etf-read-these-signs/
- https://groww.in/blog/i-have-a-strategy-behind-withdrawing-money-from-mutual-funds-do-you
- https://www.investopedia.com/terms/f/four-percent-rule.asp
- https://smartasset.com/taxes/how-to-avoid-capital-gains-tax-on-stocks
- https://www.oldmutual.co.za/customer-complaints/avoid-making-early-withdrawals-from-investment-policies
- https://www.fool.com/investing/how-to-invest/index-funds/
- https://www.investopedia.com/articles/exchangetradedfunds/11/advantages-disadvantages-etfs.asp
- https://www.fool.com/the-ascent/banks/articles/heres-what-happens-when-you-withdraw-a-lot-of-money-from-your-bank-account/
- https://weitzinvestments.com/resources/investor-education/a-116/understanding-mutual-fund-capital-gains.fs
- https://www.nerdwallet.com/article/taxes/taxes-on-mutual-funds
- https://www.etf.com/etf-education-center/etf-basics/what-is-the-creationredemption-mechanism
- https://www.gov.uk/tax-buy-shares
- https://www.thestreet.com/investing/etf-vs-index-fund-14796324
- https://www.fidelity.com/learning-center/investment-products/etf/drawbacks-of-etfs
- https://www.nasdaq.com/articles/heres-what-happens-when-you-withdraw-a-lot-of-money-from-your-bank-account
- https://moneywise.com/investing/voo-vs-vti
- https://www.nerdwallet.com/article/investing/etf-vs-index-fund-compare
- https://www.charles-stanley.co.uk/insights/commentary/what-is-capital-gains-tax
- https://www.fidelity.com/webcontent/ap002390-mlo-content/19.09/help/learn_withdrawing_money.shtml
- https://www.quora.com/What-happens-to-your-stocks-when-you-close-a-brokerage-account
- https://investor.vanguard.com/client-benefits/investment-fees
- https://www.wsj.com/articles/how-much-more-tax-wise-are-etfs-vs-mutual-funds-11675528101
- https://help.scotiabank.com/article/can-i-use-cash-from-my-investment-account-to-purchase-mutual-funds-online-with-scotia-smart-investor?origin=help-center
- https://curvo.eu/article/etf-risk
- https://www.outvest.co.za/money-advice/what-happens-if-you-need-to-withdraw-from-your-investments/
- https://www.schwab.com/etfs/costs-fees
- https://www.schwab.com/learn/story/what-happens-if-your-etf-closes
- https://www.sofi.com/learn/content/what-happens-if-stock-goes-to-zero/
- https://www.investopedia.com/articles/exchangetradedfunds/08/etf-taxes-introduction.asp
- https://investor.vanguard.com/investor-resources-education/taxes/how-mutual-funds-etfs-are-taxed
- https://www.invesco.com/us/en/insights/how-etf-navs-are-calculated.html
- https://www.sofi.com/learn/content/when-to-buy-stocks/
- https://www.icicidirect.com/idirectcontent/Home/StaticData/WeOfferETFUnderstanding.html
- https://www.barclays.co.uk/smart-investor/investments-explained/funds-etfs-and-investment-trusts/what-is-an-etf/
- https://investor.vanguard.com/investor-resources-education/retirement/income-make-the-most-of-retirement
- https://www.canstar.com.au/investor-hub/buy-sell-hold-etfs/
- https://www.schwab.com/brokerage/what-is-a-brokerage-account
- https://www.blackrock.com/sg/en/ishares/education/what-is-an-etf
- https://www.investopedia.com/articles/investing/102915/why-are-etf-fees-lower-mutual-funds.asp
- https://www.fidelity.com/learning-center/investment-products/etf/tax-rules-for-losses-etfs
- https://www.etf.com/sections/etf-basics/how-tell-if-etf-overvalued
- https://www.nerdwallet.com/article/investing/sp-500-etfs
- https://lakshmishree.com/blog/15-best-etfs-in-india-to-invest-in-2024/
- https://www.forbes.com/sites/investor-hub/article/what-is-an-index-fund-quick-guide-how-they-work/
- https://www.bankrate.com/retirement/what-is-the-4-percent-rule/
- https://www.nerdwallet.com/article/investing/how-to-invest-in-sp500
- https://www.nerdwallet.com/article/investing/high-dividend-etfs
- https://www.quora.com/Can-you-lose-all-your-money-from-investing-in-ETFs-even-if-you-dont-sell-your-position
- https://www.vanguardinvestor.co.uk/need-help/answer/how-do-i-make-a-withdrawal
- https://news.ycombinator.com/item?id=34188132
- https://www.investopedia.com/financial-edge/0113/7-easy-to-understand-etfs-to-replace-a-savings-account.aspx
- https://www.investopedia.com/articles/mutualfund/07/etf_downside.asp
- https://www.investmentfundlawblog.com/resources/investments-by-funds/investments-investment-companies/
- https://barbarafriedbergpersonalfinance.com/should-i-sell-my-mutual-fund/
- https://www.investopedia.com/articles/investing/040516/10-cheapest-vanguard-etfs-voo-vti.asp
- https://www.wisdomtree.eu/-/media/eu-media-files/other-documents/educational/intra-day-pricing-how-etf-shares-are-priced.pdf
- https://www.hl.co.uk/help/charges-and-fees/etf-charges/etfs/how-much-does-it-cost-to-hold-etfs-in-the-hl-stocks-and-shares-isa
- https://objectivefinancialpartners.com/are-mutual-fund-fees-tax-deductible/
- https://www.merrilledge.com/article/mutual-fund-and-taxes-a-primer-to-help-lighten-the-load
- https://corporatefinanceinstitute.com/resources/career-map/sell-side/capital-markets/index-investing/
- https://www.investopedia.com/ask/answers/101915/should-i-cash-out-mutual-funds-pay-debt.asp
- https://www.investopedia.com/articles/exchangetradedfunds/08/etf-liquidity.asp
- https://www.investopedia.com/why-bond-etfs-go-down-8303231
- https://www.blackrock.com/us/individual/literature/brochure/loss-harvesting-and-wash-sale-rule-considerations-en-us.pdf
- https://www.investopedia.com/articles/investing/020916/etfs-can-be-safe-investments-if-used-correctly.asp
- https://www.fidelity.com/learning-center/investment-products/etf/risks-with-etfs
- https://vakilsearch.com/blog/what-is-the-7-percent-rule-for-retirement/
- https://www.schwab.com/pricing
- https://www.cboe.com/insights/posts/why-trade-xsp-vs-spy-a-breakdown-of-the-benefits/
- https://www.etmoney.com/blog/how-long-can-we-invest-in-index-funds/
- https://www.morningstar.com/etfs/how-maximize-tax-efficiency-etfs
- https://www.money.co.uk/guides/how-are-investments-taxed
- https://www.investopedia.com/ask/answers/06/canindexfundsgounder.asp
- https://www.titan.com/articles/etf-drawbacks
- https://www.usatoday.com/story/money/columnist/krantz/2016/03/30/ask-matt-sp-500-dividends-taxable/82394944/
- https://www.nerdwallet.com/article/investing/sipc-insurance-what-it-does-and-does-not-protect
- https://www.investopedia.com/ask/answers/071816/how-are-etf-fees-deducted.asp