E*Trade Discountinues Proprietary Index Funds

[SavingCash]

To top it off they are forcing liquidation on them as well, meaning that many people will be forced to sell at the bottom of the market. I'm a little pissed, but there's little I can do. Here's the email below:

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.

View an important prospectus update with more detailed information about the liquidation. Enter the ticker symbol to access the prospectus supplement for your particular fund.

You can easily find alternative funds with the help of our powerful screener or, if you have questions or would like help finding alternative investments for your cash proceeds, please call 1-800-ETRADE-1 (1-800-387-2331) from 7 a.m. to midnight ET. Or log on to your account and send us a Secure Message through the Online Service Center.

As always, we appreciate your business and the opportunity to serve you.

[disneysteve]

To top it off they are forcing liquidation on them as well, meaning that many people will be forced to sell at the bottom of the market. I'm a little pissed, but there's little I can do.

Actually, that could easily be used to your benefit. Sell your shares and park the money in a money market fund for at least 31 days. Then reinvest it in an identical fund from another company. You'll get to deduct your losses at tax time and I doubt the market will stage any miraculous recovery in the next 31 days.

If you buy an identical fund in less than 31 days, you lose the ability to deduct the loss. You could also reinvest the money in a different fund right away, so if you own the S&P 500 fund, you could put that money in a total stock market index, for example.

[kork13]

I was going to say the same thing as DS, so I won't parrot him... However, it is interesting that they don't simply choose a different S&P 500 index (I'm sure they have multiple possibilities) to transfer the funds to... at least as a default, so that people could keep their money invested w/o hassling with it being sold and re-invested.

But maybe that's just a matter of customer service... I dunno, I'd expect my investing firm to make the change as transparent (to me, the customer) as possible--I've had something similar happen before, and they automatically transferred my assets to a nearly identical MF for me. They had obviously informed me that's what was going to happen, but I was fine with the change, so I just let it happen.

[disneysteve]

it is interesting that they don't simply choose a different S&P 500 index (I'm sure they have multiple possibilities) to transfer the funds to... at least as a default, so that people could keep their money invested w/o hassling with it being sold and re-invested.

I'd be quite upset if they transferred my money to another fund without my permission. I don't believe they have the legal right to do that. Besides, aren't they required to show that you reviewed the prospectus and agreed to the terms of any fund in which you invest?

[noppenbd]

Actually, that could easily be used to your benefit. Sell your shares and park the money in a money market fund for at least 31 days. Then reinvest it in an identical fund from another company. You'll get to deduct your losses at tax time and I doubt the market will stage any miraculous recovery in the next 31 days.

If you buy an identical fund in less than 31 days, you lose the ability to deduct the loss. You could also reinvest the money in a different fund right away, so if you own the S&P 500 fund, you could put that money in a total stock market index, for example.

All of this is true, but only in a taxable account. If this is an Etrade IRA or other tax-sheltered account you generally can't deduct the losses.

Also, you don't really lose the ability to deduct the losses if you rebuy an identical investment (it's just delayed). The disallowed loss is added to the basis of the new stock/fund purchase, so the loss can still be claimed when you sell the 2nd stock/fund. The holding period of the original stock/fund gets added to the holding period for the new fund (so if it was a long-term holding, the new fund becomes a long-term holding).

[disneysteve]

All of this is true, but only in a taxable account. If this is an Etrade IRA or other tax-sheltered account you generally can't deduct the losses.

Also, you don't really lose the ability to deduct the losses if you rebuy an identical investment (it's just delayed). The disallowed loss is added to the basis of the new stock/fund purchase, so the loss can still be claimed when you sell the 2nd stock/fund.

Both true. Thanks for filling in some details to my general info.

[SavingCash]

Thanks for the info everyone. This is in my IRA account, so it looks like I'll reinvest in a similar fund immediately since I can't write off the loss anyway.

[disneysteve]

Thanks for the info everyone. This is in my IRA account, so it looks like I'll reinvest in a similar fund immediately since I can't write off the loss anyway.

Since you'll be making a lump sum purchase instead of dollar cost averaging, you may want to consider an ETF instead of a mutual fund for this money. You'll pay a commission but typically enjoy lower expenses going forward.