On Oct. 5, the Global X Iconic U.S. Brands ETF (LOGO) will be closing operations and liquidating its assets—but in an unusual move, the fund's issuer, Global X, has halted creations for the fund first.
The creation halt took effect Sept. 13.
A creation halt is when the issuer stops allowing authorized participants (APs) to create new shares of the ETF for trading. New shares of an ETF can be created when APs present the ETF issuer with enough shares of the underlying stocks comprising the ETF's index to constitute an equivalent block of ETF shares (in LOGO's case, 50,000 shares) (read: "What Is The Creation/Redemption Mechanism?").
Regular flow of creations and redemptions is what keeps an ETF trading smoothly and efficiently. Under a creation halt, however, significant premiums and discounts to net asset value (NAV) often can emerge.
‘LOGO’ Lags In Assets
Launched in October 2017, LOGO is designed to track 100 companies deemed to have significant brand loyalty and recognition among consumers.
But the concept had never quite taken off with investors. Currently, the fund holds just $3.3 million in assets under management, most of which is likely seed capital.
In a supplement to LOGO's prospectus dated Sept. 14, 2018, Global X wrote that LOGO's closure was connected to its failure to accrue assets.
"Due to the Fund's assets remaining quite small and the expectation that the assets of the Fund will not grow sufficiently in the foreseeable future, the Adviser believes that it is in the best interest of the Fund and its shareholders for the Fund's business and operations not to continue," Global X wrote.
"After considering all of the information presented to the Board, the Board concluded that it would be in the best interests of the Fund and its shareholders to liquidate and terminate the Fund," it continued.
Global X did not respond to repeated requests for comment.
When Creation Halts Precede Closure
ETFs close all the time. Typically, however, the issuer does not halt creations in the fund before its scheduled closing date—though that has happened a handful of times in the recent past.
In July 2017, State Street Global Advisors halted creations for three of its funds that it planned to close: the SPDR S&P Emerging Europe ETF (GUR); the SPDR S&P Emerging Latin America ETF (GML) and the SPDR S&P Emerging Middle East & Africa ETF (GAF). The funds ceased trading three days later.
For LOGO, there is a two-week gap between when the fund closed creations and when it is scheduled to cease trading (Sept. 28).
Investors should be aware that, during that time, not only are trading premiums and discounts to NAV likely to arise, the fund itself will increasingly drift from its underlying index, as the portfolio managers liquidate holdings and move to cash. That may lead LOGO's performance to drift even farther from its benchmark.
Why Creation Halts Happen
Creation halts in exchange-traded products are uncommon. When they occur, often it's because a commodity pool or exchange-traded note, which trades with a fixed number of shares, has experienced a surge in demand that exceeds its supply, and the issuer needs to secure approval from the SEC to issue more shares.
However, in the case of LOGO, the creation halt was to stop investors from purchasing the fund before its eventual liquidation, said a source familiar with the situation.
LOGO is the first fund to be closed by Global X this year. Last year around this time, the firm shut seven funds, none of which had accrued more than $8 million in assets under management (read: "Global X To Close 7 ETFs").
LOGO will cease trading on Sept. 28, with full liquidation and cash distributions made to all remaining shareholders sometime on or about Oct. 5.
Contact Lara Crigger at [email protected]