When Evaluating ETFs, Should Size Matter?
Gain a deeper understanding of what matters when trading ETFs. Read more.
When it comes to assets under management (AUM), should a fund’s size be a consideration for investing in an ETF? In our opinion, no, the main consideration for investment in a transparent, active ETF should be exposure to the strategy, which includes all the benefits of the ETF structure. When evaluating ETFs’ size for investment, at Matthews Asia we believe investors should consider:
- The ETF structure is a ‘Wrapper’ – Look at the percentage ownership of the underlying securities. Although an investor may own a large percentage of the ETF, the actual percentage ownership of the underlying securities total market capitalization is likely to be very small.
- AUM is Not Liquidity – The underlying basket of securities dictate the liquidity for the ETF. Because ETFs have an open-ended structure, investors typically will have no issues moving larger positions in or out of the ETF because liquidity providers are willing to provide bids and offers at the prevailing fair value of the ETF, regardless of fund size.
- Isolated Impact – Investors transact on exchange in the secondary market. This aspect of the ETF mechanism allows smaller and larger investors to isolate their own trading activity and not be impacted by what other investors in the fund are doing.
- Closure Risk – If the ETF fails to gather assets and the manager chooses to close the fund, investors risks are primarily market exposure, potential capital gains event, and reinvestment. On the closure date, the fund’s assets are liquidated and the closing net asset value (NAV) is returned to the remaining shareholders.
When considering an investment, we believe that Investors should evaluate the ETF’s investment objectives, risk characteristics and liquidity to better understand how it may complement their allocations.
Learn more at MatthewsAsia.com.
VP, Head of ETF Capital Markets