You will be able to judge whether an ETF is large and liquid enough to hold for decades.
Grace finds an ETF on an all-world index with a TER lower than anything else on her shortlist. Its factsheet says it holds about US$40 million, a made-up figure, and on her broker's screen the gap between the buy price and the sell price is wider than on any other fund she has looked at. It looks cheap on paper. She is not yet sure it is cheap to own.
Two questions decide that: whether the fund will still exist in twenty years, and what it costs you every time you trade it.
Running a fund costs the manager money. A fund that stays small earns too little in fees to cover its costs, and managers close or merge funds that do not attract enough assets. When a fund closes, it sells its holdings and pays investors the cash value of their units.
You do not lose your money when that happens, but you lose control of the timing. The cash arrives when the manager decides, which may be just after a market fall or in a year when you had no wish to trade. You then pay commission and spread to buy a replacement, and the gap between selling and reinvesting is time out of the market. If the holding was in a taxable structure or a special account, there may be other consequences too.
There is no official minimum size that makes a fund safe. Compare the fund's assets, shown on its factsheet, with other funds tracking the same index. If one fund is a small fraction of the size of its rivals and has been around for years without growing, that is a warning. Check how long it has existed too. A young fund may simply not have grown yet, while an old one that is still small has had its chance.
The bid-ask spread is the gap between the highest price a buyer is offering, the bid, and the lowest price a seller will accept, the ask. You buy at the ask and sell at the bid, so you lose part of the spread on every purchase and every sale.
Made-up example: an ETF quotes a bid of S$9.98 and an ask of S$10.02. The spread is S$0.04, which is 0.4% of the S$10.00 midpoint. Buying S$10,000 of it costs you about 0.2% against the midpoint, or S$20. A fund with a 0.1% spread on the same purchase costs about S$5. For someone investing monthly, that difference recurs twelve times a year, which is why lesson 3.1, Expense ratio and the costs it leaves out, included the spread in the all-in cost.
Spreads are wider on listings that trade rarely. They also widen at certain times: just after the market opens, near the close, and when the market where the fund's shares trade is shut. An ETF of US companies listed in Singapore or London trades during hours when the US market is closed, and its spread can be wider until US trading begins. Checking the quoted spread at two different times of day shows you how much this moves for a given fund.
Many people judge an ETF by how many units trade each day. That number matters less than it seems. Specialist firms called market makers can create new ETF units or redeem existing ones by buying or selling the underlying shares. So a fund holding large, heavily traded companies can be bought in reasonable size even if its own daily volume is small, because the market maker can source the underlying shares.
That does not make the quoted spread irrelevant. Whatever the theory, the spread on your screen is the price you pay when you click buy. A fund with deep underlying markets and a wide quoted spread still costs you that spread. Thin trading volume is a reason to look more closely at the spread, rather than a reason on its own to reject a fund.
The same ETF is often listed on several exchanges and in several currencies. An Ireland-domiciled fund might trade in London in US dollars and in British pounds, and on other exchanges as well. These are the same fund with the same holdings, the same TER and the same tax treatment from lesson 3.3, Domicile and withholding tax on dividends.
What differs between listings is the spread, the trading hours, the currency you have to convert into and your broker's commission on that exchange. Pick the line with the narrowest typical spread that your broker supports at a reasonable fee. Trading a currency line that matches cash you already hold can also save a conversion.
Grace checks her cheap fund again. Its spread is three times that of a larger rival, and it has been small for six years. She drops it from her shortlist. When you check your own candidates, write down the time of day next to each spread, because one reading on its own can mislead.
Check the fund size and the quoted bid-ask spread at two times of day for two ETFs you are comparing and record both.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).