Jul
2024
Size matters when it comes to ETFs
DIY Investor
13 July 2024
Bigger is better is a good rule of thumb when comparing similar ETFs. Larger ETFs can exploit economies of scale to lower their costs and are less liable to liquidation with unfortunate consequences for your returns – writes Dominique Riedl
ETFs must reach a certain size to become viable. Once over that threshold, an ETF’s profits rise much faster than its costs, so the fund size is a good indicator of a product’s durability as well as its popularity.
Newly launched ETFs are in a race against time to prove themselves. Most ETF providers will give their fledgeling products about a year to grow large enough to make money. If an ETF isn’t sustainable after 12 months then there’s a danger it will be closed (see below for how liquidation can impact you).
Our tip: In our article Make the right ETF selection: tips and tricks, you can figure out which ETFs fit your investment structure and how to prioritise the individual criteria.
Large ETFs benefit
As ETFs gather more assets under management, it becomes easier to cut their expense ratios as costs shrink as a proportion of revenue. This is especially true for ETFs that track broad indices such as the FTSE 100 or MSCI World. The sheer scale of these markets gives the most popular ETFs room to manoeuvre on cost and the incentive of handsome profits if they can continue to attract investors’ cash. That’s generated intense competition between product providers, and investors have been the winners as expense ratios have continued to fall.
Large ETFs also tend to have higher trading volumes, enabling you to buy and sell quickly and pay lower bid-offer spreads as market makers can efficiently match supply and demand (creation and redemption).
The ten largest ETFs (by fund size)
Fund name | ISIN Ticker |
4 weeks chart |
Fund size in m GBP |
Ongoing charges | Return 1 year |
---|---|---|---|---|---|
iShares Core S&P 500 UCITS ETF (Acc) | IE00B5BMR087 CSP1 |
51,801 | 0.07% p.a. | 14.07% | |
iShares Core MSCI World UCITS ETF USD (Acc) | IE00B4L5Y983 SWDA |
47,726 | 0.20% p.a. | 12.58% | |
Vanguard S&P 500 UCITS ETF | IE00B3XXRP09 VUSA |
27,907 | 0.07% p.a. | 14.09% | |
iShares Core MSCI Emerging Markets IMI UCITS ETF (Acc) | IE00BKM4GZ66 EMIM |
13,734 | 0.18% p.a. | 1.90% | |
Invesco S&P 500 UCITS ETF | IE00B3YCGJ38 SPXP |
13,121 | 0.05% p.a. | 13.90% | |
iShares Core EUR Corporate Bond UCITS ETF (Dist) | IE00B3F81R35 IEBC |
11,877 | 0.20% p.a. | 2.67% | |
Invesco Physical Gold A | IE00B579F325 SGLP |
11,782 | 0.12% p.a. | 8.49% | |
iShares Core S&P 500 UCITS ETF USD (Dist) | IE0031442068 IUSA |
11,385 | 0.07% p.a. | 14.08% | |
iShares Physical Gold ETC | IE00B4ND3602 SGLN |
11,296 | 0.12% p.a. | 9.20% | |
iShares Core FTSE 100 UCITS ETF (Dist) | IE0005042456 ISF |
10,981 | 0.07% p.a. | 4.99% |
What happens if an ETF is liquidated?
Unprofitable ETFs get closed. This isn’t as bad as it sounds but it is worth avoiding. The main thing to remember is you don’t lose your money if an ETF is liquidated, unlike if a company’s shares went to zero.
The underlying assets of the ETF are still worth their market value so you can either sell your ETF shares on the stock exchange as usual or wait until the ETF provider sells the remaining assets. Either way, you’ll receive the net asset value of your ETF shares at the time of sale as a cash sum.
Naturally, you can then reinvest your cashback into the market, perhaps in a more viable ETF in the same category.
There are two main problems with being forced into cash by an ETF’s liquidation:
- The market can move against you before you’re able to reinvest your cash. This is a particular risk if you wait for the ETF provider to liquidate the product as there can be a week or so delay before you receive your cash.
- You can incur capital gains tax if you’re forced to sell a position outside of tax shelters and can’t cover it with your capital gains allowance.
Your ETF may also be merged with another to create a viable product and this can also count as a taxable capital gains event as above.
Of course, not all small ETFs are at risk of closure. A provider may expect certain products to remain niche and cover their costs with a higher expense ratio, or subsidise them for strategic reasons.
Still, ETF closures are unsettling and inconvenient when they happen, especially if they expose you to an unexpected tax event. You can guard against this on justETF.com by checking the fund size category when comparing ETFs in any particular market. We provide fund size in millions of £ and the bigger it gets, the less liable an ETF is to close.
Visit our friends at justETF >
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