Forget Liquidity, ‘Capacity’ Is Real ETF Concern

April 26, 2017

The Real Liquidity Issue

Still, few talk about capacity. There is, however, a lot of talk about liquidity. But the real liquidity issue lies in the asset classes that ETFs cover, and just how big and liquid they are to accommodate big and growing ETFs.

“The less liquid the asset class and the bigger the fund, the more you're going to run into these issues,” said Jim Wiandt, founder of, and now a consultant in the industry. “They're becoming increasingly common in the ETF space, because some of these funds have just gotten so big, that even in asset classes where you really didn't have capacity problems in the past, you're starting to get a little bit of a tilting of the tables.”

But herein also lies opportunity. For issuers with smaller funds that watch their competitors grow so big they need to bend their index, this could open the door for new assets.

Opportunity For Small ETFs

Returning to the junior gold miner space, there are other funds that continue to focus on smaller firms. As GDXJ lifts its market-cap average, a fund like the Sprott Junior Gold Miners ETF (SGDJ), with $55 million in AUM, could pitch itself as the true junior gold miner ETF, since it keeps its market-cap parameters between $250 million and $2 billion. The same could be said with the $44 million Global X Gold Explorers ETF (GOEX), which has a similar range as SGDJ, of $200 million - $2.4 billion.

So the buzzword to pay attention to going forward is “capacity.” Know when your fund is getting so big that it’s changing its index. That could mean a significant change in what you’re investing in, and maybe the signal that it’s time for you to get off the elevator.

At the time of writing, the author held none of the securities mentioned. Drew Voros can be reached at [email protected].


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