5 essential ETF Fund Facts
By Brian Bridger, CFA, FRM

While they may seem like boilerplate, the new ETF Facts documents – now a requirement for any firm offering a new ETF or renewing a prospectus – give investors a reliable, easy-to-understand synopsis of an ETF along with some insightful trading and market data. Fundata Canada collects the ETF Facts as well as the associated data, making it available as a part of its ETF data offering for the financial industry. Investors can find the ETF Facts documents on ETF firms’ websites. Here’s a look at the five key data points investors should focus on when looking at the ETF Facts documents.

Risk

The risk rating methodology used in the ETF Facts is consistent with that now being used in the Fund Facts by mutual funds. It uses the 10-year Standard Deviation (SD) to assign a risk rating based on a five-point scale, and managers are required to backfill history using proxy data if the fund does not have a 10-year track record.

This means that risk ratings will now be consistent across all mutual funds and ETFs. Up until now, this has not been the case, as companies have arrived at very different ratings for similar products depending on the methodology and time-frame they used to calculate the rating.

ETF expenses

If you thought that the Management Expense Ratio (MER) described all the fees associated with an ETF, think again. Total ETF expenses consist of the MER as well as the Trading Expense Ratio (TER). As the name suggests, the TER includes the trading costs, which are minimal for most passive funds. In fact, of the ETFs that have filed ETF Facts, about half list the TER as 0% and over 80% have a TER of less than 10 basis points (bps).

However, for some active funds and those using complex trading strategies, the TER can be quite high. Seven ETFs have a TER north of 50 bps, with the highest being 1.14%. And almost 8% of ETFs have total ETF expenses that are at least 20% higher than the MER, and four ETFs have a TER that is actually higher than the MER.

Average trading volume

This is simply the average number of units traded each day over a 12-month period. Of the ETFs that have filed ETF Facts, this number ranges from over 3 million units per day to 54 units per day. The median is currently 19,000. A lower trading-volume number does not necessarily mean that an ETF is less liquid, as this is determined mainly by the liquidity of the underlying holdings. Lower volumes could indicate, however, that an ETF is not very popular.

Consider, for example, an ETF that invests in Canadian blue-chip equities using a proprietary quantitative strategy. If the strategy is not popular with investors, the trading volume could be low despite the fact that the underlying securities are highly liquid. Volume also has a negative correlation with bid/ask spreads. So low volume could mean wider spreads, which increases trading costs.

Number of days traded

This shows the number of days that an ETF was traded out of the total number of trading days, the highest being 250 out of 250 or 251 out of 251, depending on the time frame. Of the ETFs that have filed ETF Facts, just over half have traded every day, while about 10% have traded less than 100 days during the year. The smallest number so far is 17 days out of 250, which works out to less than two days per month.

As with trading volume, this statistic is more a reflection of an ETFs’ popularity than its liquidity. Now this is not to say that an ETF with low trading volume that does not trade everyday should be avoided, but it is something that should be considered when comparing potential investments.

Average bid/ask spread

This is the average bid/ask spread as a percentage of the bid/ask midpoint over a 12-month period. The actual calculation is highly complex and extremely data intensive, but the spread basically tells you the additional cost associated with a round trip (buy-and-sell) trade. Currently, the lowest value listed on an ETF Facts is 0.01% and the highest is 2.08%. The median is 20 bps.

As mentioned earlier, in general, lower volume usually means wider spreads. However, spreads can also be affected by a number of other factors including illiquid underlying securities, active and opaque strategies, or simply a limited number of market makers. For investors, it always make sense to use limit orders when trading ETFs, but this is especially true when spreads are wide.


© 2018 by Fund Library. Brian Bridger, CFA, FRM, is Vice President, Analytics & Data at Fundata Canada Inc. and is a member of the Canadian Investment Funds Standards Committee CIFSC. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. No guarantee of performance is made or implied.
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