Learning To Love Little ETFs

September 09, 2014

2) Can you actually get in and out of the ETF?

Let’s assume for a moment that the fund we’re chasing has passed the first two hurdles: It’s doing something really unique; it’s worth the expense ratio being charged. Also, the communication from the issuer is solid, leading you to believe it’s going to deliver on its promise.

The last question—and often the most difficult—is whether you can really buy it.

If you’re a very large investor, the answer will almost surely be yes. By “large,” I mean your opening position in this new favorite ETF of yours is going to be 50,000 shares or larger. When you look at the success of new issuers like WBI just last month, initial assets didn’t come in because folks went to their Schwab accounts and started gobbling up 1,000 shares at a pop. Instead, major investors and institutions worked with authorized participants and liquidity providers to get big positions done at fair value.

That’s how WBI went from no dollars to more than $1 billion in just a few days. It’s pre-negotiated flow. But even that doesn’t mean it’s suitable for an average investor or advisory client. Consider the WBI Tactical Income Shares ETF (WBII).

It was the big winner of those WBI funds, with $147 million in net flows right out of the gate. In the days that followed, it had some volume … 30,000 or 40,000 changed hands. And then Friday—already a slow day of the week—came, and it traded a whopping 4,108 shares.

Unownable, right?

Well, not really. Most investors would look at that kind of volume and run away screaming. But here’s where slightly smarter trading and really doing some homework makes a real difference. If you go to a Level 2 screen and look at the bids and offers sitting out there, it’s surprisingly healthy:


The left side of the screen is what you can sell it for; the right side of the screen is what you can buy it for.

The fair value (the INAV) for WBI was $25.04 when I snapped this screen from Bloomberg. That means that sellers could move a large number of shares, right at fair value. Buyers would have to pay a 4-cent premium to fair value to get in, or roughly 15 basis points. For a brand-new, illiquid fund, that 15 basis point spread is extremely reasonable.


Find your next ETF

Reset All