When A Mutual Fund Is Better Than An ETF

One of the ‘best performing’ exchange-traded products of the year, RODI, is a case in point for why a mutual fund would sometimes be better.

Reviewed by: Cinthia Murphy
Edited by: Cinthia Murphy

The Barclays Return on Disability ETNs (RODI), a strategy focused on companies that treat disabled people well, landed among the best-performing exchange-traded products in the first half of the year. However, a closer look at this ETN offers a compelling case for choosing a mutual fund instead.


RODI rallied some 26 percent in the first six months of the year. On the surface, that performance is impressive considering that the S&P 500 is up only 20 basis points in the same period. But the ETN’s net asset value is actually up only about 4.5 percent.


“RODI’s market price is grossly distorted by the fund’s near-total lack of liquidity,” Paul Britt, a senior ETF analyst at FactSet, told ETF.com. The ETN actually traded only twice in the first half of the year, the last time being May 11.


That complete lack of liquidity—which reflects investor interest in this security, or lack thereof—translates into massively wide trading spreads. RODI is trading with an average spread that exceeds 60 percent. That gap speaks to just how difficult a time authorized participants have in transacting in this security in the secondary market.


In other words, there’s no liquidity, which makes the whole method of valuation of RODI shares “not viable,” Britt said.


Expensive To Own

From an investor perspective, the larger the spread, the bigger the cost to own this strategy. Today owning a security like RODI would cost more than $6,100 per $10,000 invested even though the fund only has an annual expense ratio of just 45 basis points, or $45 for each $10,000 invested.


“What can an investor do? Best case in my view: Avoid it,” Britt said. “If you must transact, use limit orders set close to NAV, and ‘close’ may be a relative term. Here’s a clear case where this strategy in a mutual fund wrapper would be an advantage—investors could access it at NAV.”


In a mutual fund, investors buy or sell shares once per day, after the close of trading. There’s no intraday activity, so there’s no spread to worry about, and investors are always transacting at NAV.


RODI has gathered nearly $28 million in assets since inception in September 2014.


Cinthia Murphy is head of digital experience, advocating for the user in all that etf.com does. She previously served as managing editor and writer for etf.com, specializing in ETF content and multimedia. Cinthia’s experience includes time at Dow Jones and former BridgeNews, covering commodity futures markets in Chicago and Brazil equities in Sao Paulo. She has a bachelor’s degree in journalism from the University of Missouri-Columbia.