Unlocking the complexities of ETF trading with AI Legalese Decoder
- May 24, 2024
- Posted by: legaleseblogger
- Category: Related News
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## Investing in ETFs with Italian Directa
My broker, Italian Directa, offers a variety of monthly investment options for a limited number of ETFs, such as iShares and Xtrackers. One ETF that caught my eye was XDPU:MIL. Its low Total Expense Ratio (TER) of 0.06% and affordable share price of only 9.x Euro made it an attractive option for me. The ability to purchase a significant number of shares for a small sum may have influenced my decision to invest in this ETF.
## Red Flags: Small Fund Size and Low Trading Volume
However, upon further research, I’ve noticed two potential red flags with XDPU:MIL. Firstly, the fund size is relatively small, at less than 100 million. Additionally, the trading volume for this ETF is quite low. These factors raise concerns about the liquidity and marketability of the shares in the future.
## How AI Legalese Decoder can help
In a situation like this, where the complexities of ETFs and market dynamics can be overwhelming, it is important to have reliable resources to help navigate potential risks. AI Legalese Decoder can assist by providing clear and concise explanations of legal and financial jargon, enabling investors to make informed decisions. By using this AI tool, investors can gain a better understanding of the implications of investing in ETFs with small fund sizes and low trading volumes, helping them mitigate risks and make sound investment choices.
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You will always be able to sell your shares due to the way ETFs work, along with authorized participants and market makers, who are incentivized to buy ETF shares that trade below the net asset value of the fund’s holdings. Suggest reading all about it before investing in ETFs (google ETF creation/redemption mechanism). However, it could be that the spread at which you sell is worse than with larger alternatives, negating any TER advantage unless you held it for a long time. Also, if the fund gets dissolved by the issuer (e.g. due to failing to grow), you will lose your tax deferral advantage, which can be pretty significant (unless your investments are tax-exempt). That said, the spread is not going to ruin you, it’s going to be a fraction of a percent, probably a small fraction.
Your fund has a TER of 0.06% but also an estimated transaction costs of 0.09%, for a total of 0.15% (15 USD on 10K USD investment in the KID calculation). I see no reason to prefer it over one of the [11 larger funds](https://www.justetf.com/en/search.html?search=ETFS&index=S%2526P%2B500%25C2%25AE&distributionPolicy=distributionPolicy-accumulating&resetPage=true) with well over $2B AUM each. Going for a swap fund may give you an additional advantage due to US withholding tax treatment (but read up on them, also check if Italy has any special treatment in place).
I would take something with higher fund size, because these have less chances to be closed in the future.
XDPU seems to be S&P500 accumulating ETF, like VUAA, but the latter is way bigger.
[https://www.etfstream.com/articles/s-and-p-500-etf-spreads-shows-why-investors-must-consider-total-cost-of-ownership](https://www.etfstream.com/articles/s-and-p-500-etf-spreads-shows-why-investors-must-consider-total-cost-of-ownership)
Good article, they calculated TER and spread differences on a similar ETF.
However, according to JustETF, XDPU (your ETF) has 0.44% spread and SPY5 (mentioned in the article has 0.12% spread.
This means that if SPY5 will pay off in 76 days compared to Ishares and Vanguard products with smaller spread, XDPU will pay off only in around four times that time, in a year approximately
small fund size and low volume are not red flags at all, market makers will take the other side of your trade if need be
you don’t need to worry about that
i wouldn’t worry too much about the fund being closed to be honest, unlikely that they’d close an 80mm fund…
[deleted]
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I suggest you XD9U for the almost same result, It follows msci USA which Is in fact s&p500 + another 100 stocks