E*TRADE to liquidate all proprietary mutual funds this week to raise capital

E*TRADE just sent a letter out to all mutual fund holders to the effect that they will be liquidating their entire family of index mutual funds this week. All funds will be cashed out by Friday:

After long and serious consideration, E*TRADE Securities has made the decision to discontinue our family of proprietary index mutual funds.

As a result, the E*TRADE S&P 500 (ETSPX), Russell 2000 (ETRUX), Technology (ETTIX), and International (ETINX) Index Funds will be liquidated on a date no later than March 27, 2009 (the “Liquidation Date”).

Of course, even though we are discontinuing these funds, as an E*TRADE customer, you have access to over 7,000 funds to help you find the right alternative.

Here are a few important points to keep in mind:

Effective as of the close of business on February 23, 2009, no purchases of the funds may be made and any applicable redemption fees or account fees charged by the funds will be waived.

If you do not redeem your shares yourself, your shares will be automatically converted to cash equal to their net asset value on the Liquidation Date. You will receive proceeds equal to the net asset value of the shares you held on the Liquidation Date after provision for all charges, expenses, and liabilities of the fund.

The redemption is treated as a taxable transaction, and you will have to pay taxes on the proceeds of the liquidation, even if your shares are automatically redeemed on the Liquidation Date.

Please be assured that this decision has nothing at all to do with the financial health of E*TRADE FINANCIAL, which has been, and continues to be, very well capitalized by every applicable regulatory standard.

I especially like the last sentence. Only a financial industry CEO could lie so effortlessly. If they are so well capitalized, why are they applying for TARP funds? Why are they liquidating their mutual funds out from under their customers, instead of just selling the business? I suspect they need the cash to cover withdrawals. There may be a run on E*TRADE going on.

Fortunately, E*TRADE’s funds don’t have a lot of money under management. Only about half a billion dollars worth of stocks will be unloaded on the market this week, by my quick estimate. However, this might be a harbinger of ill things to come, if other financial institutions start to see liquidating their proprietary mutual funds as a way to raise capital.

On the bright side, at least nobody will be forced to take a short term capital gain…

20 responses to “E*TRADE to liquidate all proprietary mutual funds this week to raise capital”

  1. I’m an ET fund holder. I’m trying to dig up some kind of business justification for this decision, and your site was the first to come up on a Google search. I wonder, are they kicking out of this market because the margins are too low? I imagine that, unless you’re Vanguard (with their goliath $36B VFINX), the management fees just don’t add up to that much. By my math, ET’s funds would only net them around a million/year in management fees, hardly a great profit considering would it would take (staff, trade execution, etc.) to run these things. As a fellow ET customer looking for cheap SPX exposure, where are you going now?

    • Hi David,

      While I think it’s true that they aren’t making much money from the funds, especially with the market this low, I just can’t see a firm liquidating funds like this under normal circumstances. I may be proven completely wrong, but my gut instinct is that this is a move of desperation. Half a billion dollars is roughly what they were asking for under TARP, as I recall. Maybe they got word the funding wasn’t coming, or that the government’s terms were too onerous. Maybe there has been a run on their money market accounts, and they need to raise cash quickly. I don’t know, but this doesn’t seem at all like the way a healthy brokerage company handles closing down a mutual fund unit.

      I’ve been out of the general market since January (2008) and started going short that March (a bit early, but better early than never), so I’m not looking for any SPX exposure right now. My E*TRADE index position was $700 worth of automatically invested shares I had left over that I couldn’t sell at the time (damn short term penalties) and I forgot about. Now I just use E*TRADE as my bank. My only long equity investments are in the Hong Kong market using their global trading platform, and a tiny bit in Germany. (Fun, but a rip off, and I’m barely treading water.)

      I’m not sure if I’ll stay short any longer, but once I exit, I think I’m just going to watch from the sidelines with a beer. I wouldn’t touch the stock market with a ten foot pole right now. Maybe it will have some incredible rallies, but I just know I’m not even half clever enough to successfully trade the market that is coming. But if I were going to go long the SPX, I’d probably use either Vanguard or SPY. If you’re not going to be making a lot of small investments, ETFs are actually a pretty good deal.

  2. This is no way for any company to treat their customers. I have been a customer of e*trade since 1995. Now I will be stuck locking in my losses! This is a very poor business decision. Hopefully, other mutual funds do not follow suite with this type of behavior.

    The question is: Is it better to wait until the liquidation date or sell the funds now? Is e*trade the company going to be around much longer?

    It should be interesting to see what happens.

    • Wes:

      I agree that this is no way to treat customers, but as I said, I think they are doing it out of desperation. I don’t think this is at all a good sign for E*TRADE. At the very least, it means they couldn’t find a buyer the business.

      As for when to sell, I don’t think it matters too much. E*TRADE’s $500M isn’t going to move the markets, so that’s not an issue. It really comes down to “which day this week do you think the market will be the highest?”

  3. I really don’t think they’re doing this out of panic, or to raise capital — does ET raise *ANY* capital by liquidating their funds? It’s all client money; they don’t own any of the assets in these funds, so I don’t see how it affects their capital position in any way whatsoever.

    I used to be allocated 10% SPX and 15% Russell 2000. I think I’m going to collapse those two holdings into a “US Domestic Equity” for 25% of the portfolio using some kind of Wilshire 5000 vehicle. BTW, if you’re on the sidelines, the next month or two might be a good time to get in…”Indeed, while no one knows the exact size of these accounts, rough estimates suggest they easily top $600 billion. At one brokerage alone, E-Trade (ETFC: 0.87, -0.02, -2.24%), 29 percent of all consumer assets were in cash by last fall, up from 17 percent in 2007.” (http://www.smartmoney.com/Investing/Short-Term-Investing/Your-Money-Swept-Away/)

    btw, I was out at Lincoln Lab last September for a conference…I’m a graduate student myself. 🙂

    • Hey David,

      E*TRADE does raise capital, because all the client money from this is going to go into the sweep accounts. I have to admit I really don’t know the full extent of what they can legally do with that money, but it really is under their management. For example, I believe they could invest it in E*TRADE bank money market accounts overnight, and that would help the bank’s reserve levels. Again, I’m not sure, but I do know at the very least that it would help capitalize their money market funds. I think people would be really scared to know what’s going on behind the scenes to keep the money market funds from breaking the buck.

      By the way, I’m the last person anybody should listen to about the market, and have no idea which way it’s going to go, other than that it will be volatile. But for the record, investing because “everybody is in cash” doesn’t make sense. The stock market is just a router of money and shares, neglecting stock repurchase and issue. There is no such thing as “everybody selling.” Every sale is a buy, every dollar in is a dollar out. If you want to argue that consumers are dumb money, and so looking at their cash levels is meaningful, then fair enough. But if this whole debacle has taught us anything, it’s that Wall Street can be pretty stupid, too!

  4. I currently have e*trade’s international index and their russell 2000 index. I am thinking of moving to the Dreyfus international index fund and buying VB to replace the russell 2000 index fund. That would be a pretty straight forward swap. (These are in IRA accounts, so tax issues are not a concern).

    VTI and VIG also look like possibilities.

    My concern now with ETF’s is what if the company decides to close them? What happens to my money? At least in the case of the e*trade or other mutual funds I will get my money back that I have invested. With an ETF, it is essentially a stock, so would I be out completely if Vanguard for example decided to shut down their ETF, right?


  5. I dumped all my ET funds overnight; the cash became available for investment today. I’ve got an open market order to replace all my SPX/RUX with a value-equivalent holding of VTI. Regarding your question about the ETF, I’m pretty sure that’s not how it works — I don’t recall that exact detail from the prospectus, but I’d be interested to know, if you take the time to dig it up.

    • I contacted Vanguard regarding the procedures in the event of a liquidation of ETF’s. Here is a quote from them, “In the event of a liquidation, Vanguard would sell the underlying securities and the proceeds would be returned to the shareholders, much like you are currently experiencing with your E*Trade funds.”

      So. I guess you money is as safe in an ETF as a regular mutual fund (with respect to liquidation of the fund).

      Of course, if an ETF was liquidated you would get the NAV of the underlying fund, not the market price.

      I am still waiting to pull the trigger on the funds.

  6. Its an expense reduction move. The amount they are making off the funds probably no longer justifies the expense as it might have at one time as a potentially growing business or… gasp another way to keep people at etrade – like issuing helocs.

    • I agree they weren’t making much money, but that doesn’t mean they have to liquidate. I’m not saying I’m sure about any of this, but why alienate customers just because the growth isn’t sufficient? I can see selling off the funds or merging them with another fund, but I really don’t understand why they’d do this unless they got benefit from their customer’s accounts being liquidated to cash. These funds may not have been making much money, but they had about $500M under management. At an average fee of 0.75%, that’s still a few million every year. Sure they weren’t making a killing, but unless they were very badly managed, they had to be at least breaking even.

  7. If you reinvest funds after they are liquidated from E-Trade Funds, you can request reimbursements on transactions fees.

  8. I have to say that we live in very interesting times. Personally I am very glad I hold my financial assets at Charles Schwab. They cost a bit more than eTrade or scottrade but the company is run a lot more conservatively than its rivals. I pay a little more in the end but the price is worth it because I get to sleep soundly at night.

  9. We’re estate liquidators in Los Angeles, CA and have worked with two different clients this month that lost their shirts with E*Trade … shame.

    They’re now having to liquidate their property and all of their assets.

    In searching for info on what might have gone wrong for them (so I can empathize more with their situation) I came across your post.

    Rather ironic that E*Trade liquidates and in turn, some of their clients liquidate … hmmm.

    Even though it’s a bit dated, this post was right on point for my search. Thanks.

  10. I like this web site, I stumbled upon only the informacfion I needed, congrats. I give a huge hello and so i will return to this amazing site in the near future.

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