Risks of investing in new ETFs?

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silviabarros
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Risks of investing in new ETFs?

Post by silviabarros » Wed Feb 12, 2020 9:26 pm

Hello everyone!

I am very new in investing and recently started investing my savings in ETFs. I am currently looking for ETFs that do not include businesses involving weapons.

I found a few that look good but they are new - they started in January 2019 or January 2018. Because they are so new I am not sure how to evaluate their performance.

Which parameters should I look at to be sure the ETF has enough investors to go on and that tell me how good it is? How can I be sure I'll be able to sell it when the time comes?

I've been looking at the number of holdings (I would say >300 is good?), the companies (whether they are big or not), the involved countries and the total return (but only have 1 year of data here). Am I on the right track?

Thanks!

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grabiner
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Re: Risks of investing in new ETFs?

Post by grabiner » Wed Feb 12, 2020 11:58 pm

Welcome to the forum!

You can usually assume that any index ETF from an established provider will track its index minus expenses. (You can confirm this from the performance numbers; if an ETF has 0.5% expenses, and the annualized return of its index was 5%, the ETF should have an annualized return close to 4.5%.) Past performance, whether of the ETF or of the index it tracks, is not particularly relevant; the fact that US stocks outperformed foreign stocks in recent years doesn't tell you anything about whether US or foreign stocks will do better in the future.

Expenses are important because they reduce your returns; if your ETF holds stocks which return 5%, you will get a 4.9% return if the ETF charges 0.1% expenses, but a 4% return if the ETF charges 1% expenses.

If an ETF has too few investors, it might be merged into another ETF or liquidated. This is not a concern in an IRA, when you can find another ETF or mutual fund for your investments. But for a taxable investment, if the ETF is liquidated, you will have to pay a taxable capital gain, and if it changes in a way you don't like, you will have to sell it for a taxable capital gain.

For taxable investments, you should only use stock funds you expect to hold forever, only selling when you need to spend their value. Every time you change stock funds (whether ETFs or mutual funds), you pay capital-gains tax. This is a risk with socially responsible ETFs; even if the ETF remains socially responsible, its definition of responsibility may not match yours in the future.

Even in an IRA, where you don't have to worry about taxable gains, you should only buy low-volume ETFs which you expect to hold for a long time. The problem here is that low-volume ETFs tend to be expensive to trade, so if you buy and sell them frequently, you will lose a lot to transaction costs.

(edited to fix typo)
Last edited by grabiner on Thu Feb 13, 2020 8:14 pm, edited 1 time in total.
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Re: Risks of investing in new ETFs?

Post by MotoTrojan » Thu Feb 13, 2020 12:37 am

The amount of wealth lost in such an endeavor from even a modest 0.5% expense ratio increase is significant. I’d just use targeted charity to help push for your beliefs. The shares are already out there; you aren’t giving money to the weapon makers, only taking it (dividends) from them.

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silviabarros
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Re: Risks of investing in new ETFs?

Post by silviabarros » Thu Feb 13, 2020 12:47 am

But even of we don't have into account one's beliefs, what is the risk of investing in new ETFs and how to evaluate them? In this case, the ones I am talking about are iShares (Blackrock).

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Re: Risks of investing in new ETFs?

Post by rascott » Thu Feb 13, 2020 1:28 am

An ETF is just a fund.... no different than a mutual fund in most ways. As long as the fund owns the underlying stocks, you'll be fine.... even if the ETF itself shuts down, you'll still have the value of the underlying stocks. There may be tax implications in a liquidation of the fund, but that's about it.

Ishares/Blackrock is one of the 3 largest fund companies that exist. I wouldn't lose a minute of sleep over using any of their funds

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Re: Risks of investing in new ETFs?

Post by snailderby » Thu Feb 13, 2020 10:11 am

Welcome to the forum!

What ETFs are you considering? What indexes do they track? What are their expense ratios? What are their current AUMs, average daily volume, and average spreads? Are you holding these ETFs in a taxable account or tax-advantaged account?

Like grabiner said, low-volume ETFs often have wider bid-ask spreads. There's also a risk with holding low-volume ETFs in a taxable account if the ETF fails to catch on and gets closed. (Cf. http://investwithanedge.com/etf-deathwatch-january-2020.)

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Re: Risks of investing in new ETFs?

Post by danielc » Thu Feb 13, 2020 11:45 am

silviabarros wrote:
Wed Feb 12, 2020 9:26 pm
Hello everyone!

I am very new in investing and recently started investing my savings in ETFs. I am currently looking for ETFs that do not include businesses involving weapons.

I found a few that look good but they are new - they started in January 2019 or January 2018. Because they are so new I am not sure how to evaluate their performance.

Which parameters should I look at to be sure the ETF has enough investors to go on and that tell me how good it is? How can I be sure I'll be able to sell it when the time comes?

I've been looking at the number of holdings (I would say >300 is good?), the companies (whether they are big or not), the involved countries and the total return (but only have 1 year of data here). Am I on the right track?

Thanks!
The S&P 500 Catholic Values ETF started in 2016 and it does not invest in weapon businesses, among other things.

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Re: Risks of investing in new ETFs?

Post by danielc » Thu Feb 13, 2020 11:48 am

MotoTrojan wrote:
Thu Feb 13, 2020 12:37 am
The amount of wealth lost in such an endeavor from even a modest 0.5% expense ratio increase is significant. I’d just use targeted charity to help push for your beliefs. The shares are already out there; you aren’t giving money to the weapon makers, only taking it (dividends) from them.
The S&P 500 Catholic Values ETF (CATH) has an ER of 0.29%. That's not too bad.

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Re: Risks of investing in new ETFs?

Post by Texanbybirth » Thu Feb 13, 2020 11:54 am

danielc wrote:
Thu Feb 13, 2020 11:45 am
silviabarros wrote:
Wed Feb 12, 2020 9:26 pm
Hello everyone!

I am very new in investing and recently started investing my savings in ETFs. I am currently looking for ETFs that do not include businesses involving weapons.

I found a few that look good but they are new - they started in January 2019 or January 2018. Because they are so new I am not sure how to evaluate their performance.

Which parameters should I look at to be sure the ETF has enough investors to go on and that tell me how good it is? How can I be sure I'll be able to sell it when the time comes?

I've been looking at the number of holdings (I would say >300 is good?), the companies (whether they are big or not), the involved countries and the total return (but only have 1 year of data here). Am I on the right track?

Thanks!
The S&P 500 Catholic Values ETF started in 2016 and it does not invest in weapon businesses, among other things.
Thanks for posting this, I hadn't heard about it. I've only heard of the Ave Maria family of funds, which are more actively managed.
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Re: Risks of investing in new ETFs?

Post by MotoTrojan » Thu Feb 13, 2020 12:11 pm

danielc wrote:
Thu Feb 13, 2020 11:48 am
MotoTrojan wrote:
Thu Feb 13, 2020 12:37 am
The amount of wealth lost in such an endeavor from even a modest 0.5% expense ratio increase is significant. I’d just use targeted charity to help push for your beliefs. The shares are already out there; you aren’t giving money to the weapon makers, only taking it (dividends) from them.
The S&P 500 Catholic Values ETF (CATH) has an ER of 0.29%. That's not too bad.
Good find. Has tracked the S&P500 pretty well since inception, just the ER tracking error.

https://www.portfoliovisualizer.com/bac ... ion2_2=100

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silviabarros
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Re: Risks of investing in new ETFs?

Post by silviabarros » Thu Feb 13, 2020 11:08 pm

snailderby wrote:
Thu Feb 13, 2020 10:11 am
Welcome to the forum!

What ETFs are you considering? What indexes do they track? What are their expense ratios? What are their current AUMs, average daily volume, and average spreads? Are you holding these ETFs in a taxable account or tax-advantaged account?

Like grabiner said, low-volume ETFs often have wider bid-ask spreads. There's also a risk with holding low-volume ETFs in a taxable account if the ETF fails to catch on and gets closed. (Cf. http://investwithanedge.com/etf-deathwatch-january-2020.)
Thanks for this! I was checking several and after doing the analysis of those parameters, I was inclined to go with these:
- iShares MSCI World SRI UCITS ETF: https://www.ishares.com/uk/individual/e ... ts/290846/ with an average volume of around 100k in the past year and a s the last spread was 0.033 euros
- iShares MSCI Europe SRI UCITS ETF: https://www.ishares.com/uk/individual/e ... -ucits-etf with an average volume of around 30k in the past year and the last spread was 0.18 euros

I guess with these volumes the risk of closing is low? They both track MSCI and their ER is 0.20%.

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silviabarros
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Re: Risks of investing in new ETFs?

Post by silviabarros » Thu Feb 13, 2020 11:10 pm

danielc wrote:
Thu Feb 13, 2020 11:48 am
MotoTrojan wrote:
Thu Feb 13, 2020 12:37 am
The amount of wealth lost in such an endeavor from even a modest 0.5% expense ratio increase is significant. I’d just use targeted charity to help push for your beliefs. The shares are already out there; you aren’t giving money to the weapon makers, only taking it (dividends) from them.
The S&P 500 Catholic Values ETF (CATH) has an ER of 0.29%. That's not too bad.
Thank you for showing me good alternatives!

I am in Europe so I was looking for ETFs in iShares. I found some socially responsible investing options, and was thinking to go with these. Both have an ER of 0.20%
- iShares MSCI World SRI UCITS ETF: https://www.ishares.com/uk/individual/e ... ts/290846/
- iShares MSCI Europe SRI UCITS ETF: https://www.ishares.com/uk/individual/e ... -ucits-etf

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