Counterparty Risk is important to consider when picking an ETF. How likely is it that the ETF will disappear? I do not want to pick an arbitrary number like $1Bn but most funds that are over 5 years old that are solid usually have over $500million in the fund. This does not mean that smaller funds cannot have solid performance or cannot service a place in a portfolio.
“The bigger they come, the harder they fall”
We have heard the saying and this applies to funds as well (more often than not). The reputation of the provider is also important in counterparty risk, i.e. who is the company behind the Ticker. This is not to say small funds or new funds should not be given a chance, many new funds are doing exciting things and there is a sometimes great reward for people who get in early (think about the early investors in Cathie Woods’ ARKK fund) and so if you like the idea of what a fund is doing, it is ok to take the measured risk and get in early.
That said, I do experiment with some exciting smaller funds myself. Let’s take streaming for example. Many people will know of businesses like Disney+, Roku or Netflix, (by the way, did you know Netflix actually owned Roku and sold its stake for $7.7M, it would have been worth $7Bn if they held on till after the pandemic here is a youTube short story on it). Anyway, I digress, instead of buying those stocks, one could decide they want exposure to streaming and are excited about where streaming is going in the world. In comes a specialized ETF like SUBZ, it is only interested in streaming (includes, Spotify, FUBO, etc) but because it was only launched in February 2021 it is less than a year old and has under $40m.
Roundtree hill is a decent provider so it would not be shocking to see the fund grow. But if an investor wanted a much bigger, fund, they could go for ILCB (run by iShares, which are a massive provider) it also has ROKU, DISNEY and NETFLIX created in 2004 and has over $800m but is not solely focussed on streaming. Instead, it focuses on large and midcap US equities.
So while a bigger fund and provider may give some investors peace of mind, it is not to be used alone and should not override your portfolio/investment goals. Before you pick any ETF, remind yourself of what you want to achieve and then let the size of the fund, and the provider.
All of these stocks and ETFs can be viewed on yahoo finance using the symbols I have placed in the article.
Remember, none of this is investment advice, and is here for your education and entertainment.
Now we covered the key areas I look at when picking a fund, Next time, we will go back to looking at some exciting opportunities ETFs create. Here is a peak, I live in Nigeria and cannot afford to buy a US property, how can I take advantage of a US property market boom? I get asked this a lot. The answer will be in the next article.
If you have any questions, feedback, or comments, I would love to hear from you personally. chibby@youbackyou.com
