Won't I be able to sell my ETF?

[sebaaaa]

My broker (Italian Directa) offers monthly investments for a limited number of ETFs, including some iShares, Xtrackers etc. So I opted for the XDPU:MIL. TER is low (0.06%) and the share price is only 9.x Euro, so for a small sum you get a decent number of shares (perhaps that tricked me psychologically).

But I've noticed two red flags: fund size is small (< 100 million) and the trading volume is really low. Am I running the risk of not being able to sell my ETF shares in the future?

 

[jrchristian]

@sebaaaa You will always be able to sell your shares due to the way ETFs work, along with authorized participants and market makers, who are incentivized to buy ETF shares that trade below the net asset value of the fund's holdings. Suggest reading all about it before investing in ETFs (google ETF creation/redemption mechanism). However, it could be that the spread at which you sell is worse than with larger alternatives, negating any TER advantage unless you held it for a long time. Also, if the fund gets dissolved by the issuer (e.g. due to failing to grow), you will lose your tax deferral advantage, which can be pretty significant (unless your investments are tax-exempt). That said, the spread is not going to ruin you, it's going to be a fraction of a percent, probably a small fraction.

Your fund has a TER of 0.06% but also an estimated transaction costs of 0.09%, for a total of 0.15% (15 USD on 10K USD investment in the KID calculation). I see no reason to prefer it over one of the 11 larger funds with well over $2B AUM each. Going for a swap fund may give you an additional advantage due to US withholding tax treatment (but read up on them, also check if Italy has any special treatment in place).

 

[sebaaaa]

@jrchristian Thanks so much for your nuanced answer! I had already invested in ETFs time ago (mostly the larger Vanguard ones) but then pulled out in order to profit from fixed-interest savings accounts.

My goal now is to invest small amounts but every month, which led me to the "saving plans" my broker provides. My thought was to avoid paying a 5€ commission on buying 2-3 shares of, say, VUAA. So the only S&P 500 ETF they offer in this plan is the Xtrackers.

Based on what you say, I'll reconsider my strategy. Perhaps it's best to save up more, invest less often (maybe 2-3 times a year) and buy a better ETF instead. Also, I had not considered the transaction costs, so thanks for that as well. Never noticed that.

Thanks!

 

[jrchristian]

@sebaaaa Check this out also: https://corporate.vanguard.com/cont..._invest_now_or_temporarily_hold_your_cash.pdf

Assuming the allocation you have determined is right for you, i.e. you have found the best place for (part of) your money, it's, on average, best to move it there ASAP, rather than let it trickle down into the best place while the rest remains in a worse place.

 

[luther9]

@jrchristian

The 0% interest
assumption is consistent with the investor leaving
cash in a near-zero interest-bearing checking or
savings account during the CA period.

this is quite an asumption.

 

[jrchristian]

@luther9 Agreed, but that part (the simulation) is just one of the arguments. "We find that historically, LS outperformed CA roughly two-thirds of the time. This result is consistent with the fact that over the period 1976–2022, U.S. stocks and bonds outperformed cash—as proxied by the 3-month U.S. Treasury bill rate— 76% of the time for stocks and 68% of the time for bonds. This highlights how a cash allocation, even if temporary, represents the opportunity cost of lost risk premium." There's also this related study comparing dip buying (10%/20% dip) with T-bill rates as the cash proxy: https://www.pwlcapital.com/wp-content/uploads/2021/04/PWL-Felix-Warwick-Buy-The-Dip_A.pdf .

Other than these investor-aimed studies, I've skimmed through academic papers showing/arguing that, considering a bunch of factors, incl. inverse yield curve, Shiller PE, etc. to time investments is not sufficient to time the market successfully more often than not, but unfortunately don't have links at the ready: encourage anyone to delve deep into this with google scholar, etc. (Ben Felix's videos on the topic are useful starting points, even if you don't agree with everything he says / cites.)

 

[italia19]

@sebaaaa I would take something with higher fund size, because these have less chances to be closed in the future.

XDPU seems to be S&P500 accumulating ETF, like VUAA, but the latter is way bigger.

 

[cewilder]

@sebaaaa https://www.etfstream.com/articles/...vestors-must-consider-total-cost-of-ownership

Good article, they calculated TER and spread differences on a similar ETF.

However, according to JustETF, XDPU (your ETF) has 0.44% spread and SPY5 (mentioned in the article has 0.12% spread.

This means that if SPY5 will pay off in 76 days compared to Ishares and Vanguard products with smaller spread, XDPU will pay off only in around four times that time, in a year approximately

 

[jason94]

@sebaaaa small fund size and low volume are not red flags at all, market makers will take the other side of your trade if need be

you don't need to worry about that

i wouldn't worry too much about the fund being closed to be honest, unlikely that they'd close an 80mm fund...

 

[sandiamoon]

@sebaaaa N n. B bb. BCI ucihc

 

[juda1986]

@sebaaaa I suggest you XD9U for the almost same result, It follows msci USA which Is in fact s&p500 + another 100 stocks