Learning To Love Little ETFs

September 09, 2014

The other thing to look at is the depth. There are real buyers and sellers out there for “WBII,” and not just at 100- or 1,000-share lots. They may not be trading at rapid fire, but this is a real market. Compare this with CFA’s market at the same time:


While this is still a functional market—centered on fair value, which was $35.49 when I snapped this— it’s substantially thinner. There are lower lots, further away from fair value. But it’s worth noting it’s still a functional market, and should the screen continue to look like this, you’d expect to be able to move a few thousand shares in and out with relatively little difficulty. You’d still need to use limit orders, and you might have to simply accept buying on the ask and selling on the bid, but you’d get your trades done without too much chaos.

In other words, while CFA might have failed step 2 of the checklist, both CFA and WBII would probably pass step 3. Yes, they’re illiquid, but their markets are functional and certainly make the ETFs ownable. For comparative reference, this is what a broken market would look like, courtesy if the iPath Global Carbon ETN (GRN):


The lights are on here, but really, there’s nobody home.

New Funds = More Homework

The bottom line is simple: Investors are often drawn to large, established ETFs because they’re the easy button of investing. Nobody ever lost a client because they picked the largest, most liquid and cheapest ETF in a given asset class. But the newcomers can be owned, often quite easily.

You’ll just have to do a significant amount of legwork to make sure you’re getting the exposure you want—and in a stable package, and you’ll be able to access it through the public markets without too much headache.

At the time of this writing, the author held no positions in the ETFs listed. You can reach Dave Nadig at [email protected], or on Twitter @DaveNadig.

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