What’s The Big Deal About An ETF’s Size?

The majority of exchange traded funds (ETFs) boast low costs, however when there is an issue of liquidity and a low asset base, ETFs can sometimes be a bit costly for investors.

Many of these ETFs that are more costly are young ETFs with assets under $50 million.  For example, 48% of the ETFs that have an asset base of under $50 million have a bid-ask spread of more than 0.5%, meaning that an investor who buys and sells one of these ETFs could potentially give up 1%, reports Eleanor Laise of The Wall Street Journal.

The rank of these less-liquid ETFs is expanding as money available to seed new ETFs has dried up while ETF providers unveil new ETFs.  In fact, there are nearly 500 ETFs  waiting to be launched. Of these new ETFs, some are launching with around $2.5 million in assets as opposed to the $20-$30 million range that was seen a couple of years ago.

Rest assured, though, that the providers are working to improve the trading experience investors have with the world of ETFs.

This doesn’t mean that an investor doesn’t have a plethora of choices. There are plenty of ETFs that have $50 million or more in assets, and if an investor is having trouble finding one that tracks a specific sector he should probably keep in mind the risks involved when buying ETFs with few assets.

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