Learning To Love Little ETFs

September 09, 2014

2) Does the fund do what it says?

Normally, our Efficiency metric is the shorthand way of answering the question of whether an ETF delivers on its core promise in a way that is reasonable in costs and conservative with structural or other risks.

For a brand-new fund, this is extremely hard to measure. But there are a few things you can look at. The first and most obvious is expenses. Sticking to CFA, the ETF has an annual expense ratio of 58 basis points, or $58 for each $10,000 invested, versus 25 basis points for SPLV, and just 15 basis points for USMV. All else equal, CFA will have to outperform those strategies pretty consistently to earn back that higher fee.

As for risks, the primary ones to consider are structural. CFA isn’t an ETN, so there are no real counterparty risks. Also, as a brand-new fund, it’s unlikely to close immediately. But when the fund enters that dreaded “middle-aged” area—say, one to two years old—and if it still has very low assets and volume, well, it can be very hard to predict if the issuer is going to cut its losses and move on.

Measuring performance can be even trickier. With a bespoke index like the one CFA is tracking, it can take quite some time for data providers to get all their ducks in a row. During that opening few months, investors are really at the mercy of issuers maintaining good information flow.

Unfortunately, Compass doesn’t seem to publish any kind of daily performance information on its website, or that of the index. Worse, that website isn’t really even done yet, as witnessed by this slightly odd disclaimer:


I’m not just picking on one company here. This is a chronic problem with many new-issuer launches. Without up-to-date information from issuers, how can investors possibly know how well a fund is or isn’t doing? Without that comfort level, how could you possibly be an early adopter?

In the case of CFA, a very deep dive into the Bloomberg terminal suggests that since its inception on July 2, the ETF has returned 0.94 percent, while the index its tracking has returned 1.37 percent. That’s a lot of slippage in a short period of time.


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