Does fund size matter?

[vhk56]

I have been seeing some posts on the forum where someone indicated that they prefer fund A over B, though they both track the same index, because A is substantially bigger in size. What influence does fund size have in returns? Wouldn't it be better to go for fund B if it has a lower TER?
Example:
A: iShares Core MSCI World UCITS (Acc) , TER =0.2
B: SPDR MSCI World UCITS (Acc), TER = 0.12
The fund size of A is much bigger than that of B. But, their charts look almost identical, and B has even a lower TER than A. Why would A be a preferable option as compared to B?

[Stork]

I think the main worry about small funds is the risk that they are closed for lack of profits to the issuer.

[invest4]

My understanding is that smaller funds may potentially have more liquidity / buying and selling challenges due to a smaller amount of assets.

It is not enough to simply look at whether A is larger than B. Rather, do both have sufficient assets so that the risk of running into these potential issues is low?

[idc]

Fund size matters for actively traded funds in the sense that the successful ones would find it harder and harder to find better opportunities for higher returns.

For index funds, a larger size should be an advantage on a few levels, provided they are well run:
- Should have lower costs and hence should offer lower expense ratios.
- More staying power

The primary criteria I am using when selecting a fund (and I assume index tracking ETFs here), in somewhat priority order:
- expense ratio (the lower the better)
- how close it it tracking the index
- tenure of the manager (the longer the better)
- time since inception (the longer the better)

In general, I would assume most of these correlate positively with the size of the fund

[galeno]

Agree 100%.

Fund size matters for actively traded funds in the sense that the successful ones would find it harder and harder to find better opportunities for higher returns.

For index funds, a larger size should be an advantage on a few levels, provided they are well run:
- Should have lower costs and hence should offer lower expense ratios.
- More staying power

The primary criteria I am using when selecting a fund (and I assume index tracking ETFs here), in somewhat priority order:
- expense ratio (the lower the better)
- how close it it tracking the index
- tenure of the manager (the longer the better)
- time since inception (the longer the better)

In general, I would assume most of these correlate positively with the size of the fund

[Jack FFR1846]

What I notice with an ETF is that a large one, with lots of daily volume has a very, very small spread between ask and bid. So you can buy or sell and not be way off the average price. With a small fund, you pay a premium because the spread is so much bigger. This matters to me when buying or when doing tax loss harvesting, where I can use limit buys and sales.

[retiringwhen]

What I notice with an ETF is that a large one, with lots of daily volume has a very, very small spread between ask and bid. So you can buy or sell and not be way off the average price. With a small fund, you pay a premium because the spread is so much bigger. This matters to me when buying or when doing tax loss harvesting, where I can use limit buys and sales.

This is and should be true in general, but at least for Vanguard that is not really true in practice. Even very small AUM ETFs like VIOV and the Factor ETFs have very small spreads usually less than $0.02 if you trade through Vanguard (can't say for other brokerages).

I also agree that smaller is better for active funds, and bigger is better for ETFs with the caveat above.

At to risk of liquidation, at least for Vanguard, it seems like anything under $1B is at risk of closure eventually, and I would say I would be very skeptical of long-term viability for other ETFs with AUM under $100M. There are literally several thousand ETFs that have no business existing, that will shake itself out eventually.

[HKexpat]

Usually, larger funds can deliver lower expense ratios. But the iShares fund was established in 2009 vs. 2019 for SPDR. If they have a lot of buy-and-hold investors who don't want to realize capital gains (or don't look at expense ratios), it may be profitable for them to keep the higher ER even if it means losing some new investors. Between those two specific funds, I'd go for SPDR.

VWRA also comes in at a 0.22 TER, even though it was opened in 2019 as well. The difference is that VWRA also includes emerging markets. Small portion of the portfolio, so you actually pay quite a lot for this extra exposure, relative to going with SPDR + an EM index (or just skipping EMs entirely). In practice, it's $1,000/year on a million-dollar portfolio, and it's plausible that EMs will outperform developed markets by 0.1% over time (at the expense of being higher risk).

[vhk56]

Thank you everyone for sharing your understanding on this topic. I like the criteria shared by idc

The primary criteria I am using when selecting a fund (and I assume index tracking ETFs here), in somewhat priority order:
- expense ratio (the lower the better)
- how close it it tracking the index
- tenure of the manager (the longer the better)
- time since inception (the longer the better)

And in the context of the two funds that I had indicated, the SPDR doesn't throw any red flags and I prefer to go with that, given the low TER

[alex_686]

Thank you everyone for sharing your understanding on this topic. I like the criteria shared by idc

The primary criteria I am using when selecting a fund (and I assume index tracking ETFs here), in somewhat priority order:
- expense ratio (the lower the better)
- how close it it tracking the index
- tenure of the manager (the longer the better)
- time since inception (the longer the better)

And in the context of the two funds that I had indicated, the SPDR doesn't throw any red flags and I prefer to go with that, given the low TER

Tracking Error is more important than the expense ratio. If you are buying a index fund you are buying the Beta, or the index. The ER only matters to the extent that it increases the tracking error.

I wouldn’t care much about the length of a specific manager or how long it has been around? You are using a objective criteria as a proxy for a subjective criteria - the strength of management and operations. For most plain vanilla index funds from a major sponsor it is very strong. I would not care if the current portfolio manager quit yesterday and was replaced by his second in command. They tend to have derp benches.

[Commando303]

Thank you everyone for sharing your understanding on this topic. I like the criteria shared by idc

The primary criteria I am using when selecting a fund (and I assume index tracking ETFs here), in somewhat priority order:
- expense ratio (the lower the better)
- how close it it tracking the index
- tenure of the manager (the longer the better)
- time since inception (the longer the better)

And in the context of the two funds that I had indicated, the SPDR doesn't throw any red flags and I prefer to go with that, given the low TER

Tracking Error is more important than the expense ratio. If you are buying a index fund you are buying the Beta, or the index. The ER only matters to the extent that it increases the tracking error.

I wouldn’t care much about the length of a specific manager or how long it has been around? You are using a objective criteria as a proxy for a subjective criteria - the strength of management and operations. For most plain vanilla index funds from a major sponsor it is very strong. I would not care if the current portfolio manager quit yesterday and was replaced by his second in command. They tend to have derp benches.

Tracking-error, I believe, is exaggerated beyond its merit: it really does not matter. One broad-market index isn't "superior" to another; thus, too, it becomes tiresome to hear people complain that some fund is miming a lesser-known index than the ubiquitous S&P 500. At times, the deviation of fund from its index will be to its detriment, and at others to its favor -- the investor still is riding along with a broad basket of securities.

[alex_686]

Tracking-error, I believe, is exaggerated beyond its merit: it really does not matter. One broad-market index isn't "superior" to another; thus, too, it becomes tiresome to hear people complain that some fund is miming a lesser-known index than the ubiquitous S&P 500. At times, the deviation of fund from its index will be to its detriment, and at others to its favor -- the investor still is riding along with a broad basket of securities.

I am confused by your comment. Could you please expand on this?

Tracking error is the variation between the fund and the underlying index's return. If you are buying a index fund what you want is the index's return - or as close as possible. Tracking Error captures all forms of drag. So how is this not the right form of measurement?

What I really find confusing is your comment about the tracking error between a "lesser-known index than the ubiquitous S&P 500." This makes no sense. One should not expect one index to track another index. I mean, if the 2 indexes did track each other then why have 2 indexes?

Again, Tracking Error is a relative measure, not a absolute or objective measure.

To extend a bit more, if you are investing in a active index one should be hoping for a high tracking error. If you had a low tracking error than you are paying active management fees for passive results.

[id_afstand]

For European ETFs it is easy to outperform their index. Take MSCI World: what funds always show is the performance of the net index, after dividend withholding taxes. MSCI assumes maximum tariffs (like US 30%), while Irish ETFs use the tax treaty, reducing US withholding tax to 15%. The difference between net index (after withholding tax) and gross index is around 0,6%. On average, an Irish world ETF like IWDA pays 11%-12% dividend withholding tax, which is around 0,25% of the asset, while the index assumes that to be around 0,6%.

[petulant]

Not to poo-poo the excellent input, but remember that as long as we're talking about reasonable index funds, most other factors will have a much larger impact: fund provider, expense ratio, what account type the fund will be in, how you manage your taxes, and so on.

In other words, it's not the fund size, it's how you use it.