Sometimes, it pays to "think small"... That might sound contradictory to popular advice about always dreaming big. And of course, it's human nature to shoot for the stars with almost everything in life.
Some Tiny Funds Have a Secret Advantage
By Marc Gerstein, director of research, Chaikin Analytics
Sometimes, it pays to "think small"...
That might sound contradictory to popular advice about always dreaming big. And of course, it's human nature to shoot for the stars with almost everything in life.
But when it comes to assets under management ("AUM"), it's great to have an open mind...
For example, as I discussed last Friday, the tiny Royce Quant Small-Cap Quality Value Fund (SQLV) employs a better value strategy than its larger peers.
An exchange-traded fund ("ETF") that doesn't insist on raising billions in AUM can be creative. It doesn't need to worry that unusual strategies will turn off prospective investors.
However, many investors treat small ETFs like SQLV as if they're "penny stocks." They worry that shares will be hard to trade or that liquidity might even dry up altogether.
Today, I'll explore that idea using a case study. And as we'll see, it's simply not true...
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I'm focusing on the Valkyrie Balance Sheet Opportunities Fund (VBB).
Its AUM is only about $0.6 million. In a world of billion-dollar companies, that's microscopic.
The ETF's prospectus notes that it seeks to invest in "operating companies that directly or indirectly invest in, transact in, or otherwise have exposure to bitcoin (such as bitcoin custodians, exchanges or traders)." And these investments can include "companies that hold or transact in relatively small amounts of bitcoin."
Frankly, this ETF isn't my cup of tea. And given its history, the Power Gauge doesn't rank it. So I'm not writing this essay to express any opinion on its merits as an investment.
Instead, I just want to focus on whether folks who like VBB can effectively trade its shares.
We'll start with an important distinction between shares of ETFs and regular companies...
ETF shares issued on day one aren't increased by secondary offerings every now and then. And they aren't repurchased like a company's stock.
Rather, a complex exchange mechanism involving "authorized participants" ("APs") creates and eliminates ETF shares every day.
I won't go too deeply into the weeds. Just know that APs provide baskets of stocks that line up with the ETF's portfolio. In exchange, they receive "creation units." APs also can offer cash and receive stock baskets.
In the end, if you place an order to trade VBB shares... it will get filled.
The other party might be another investor. Or your order might get filled as a result of the APs' activities.
Here's the important point...
VBB's liquidity isn't based on the ETF only having about $0.6 million in AUM. Instead, it's based on how the APs can trade the stocks within the portfolio.
And most of the stocks in VBB's portfolio have market capitalizations well into the billions. Some of its biggest holdings include Tesla (TSLA), BlackRock (BLK), and Mastercard (MA).
APs can trade all of those stocks more quickly than humans can blink an eye.
Now, VBB also invests in some microcaps. The smallest is BTCS (BTCS), with around $21 million in market cap. And Banxa Holdings' (BNXAF) market cap is roughly $31 million.
But importantly, BTCS and Banxa aren't illiquid penny stocks...
For example, the dollar value of VBB's position in BTCS amounts to 12.5% of the three-month average dollar value of shares traded (volume times share price).
That would take longer than the blink of an eye to sell. But it's doable.
And many ETFs hold positions like that...
The giant iShares Russell 2000 Fund (IWM) has roughly $69.1 billion in AUM. And it has similar ratios in holdings like Cryptyde (TYDE) at 12%, VistaGen Therapeutics (VTGN) at 24%, and Loyalty Ventures (LYLT) at 33%.
The Banxa position within VBB requires a more delicate trading hand. Its stake is 154% of the three-month average dollar value of shares traded.
But even that isn't unique...
The same ratio for iShares Russell 2000 Fund's stake in Viant Technology (DSP) is 213%.
Because VBB is so tiny, Valkyrie could decide it's not worthwhile to keep operating it. If that were to happen, the ETF manager would simply notify its investors and sell all its positions.
You wouldn't lose your remaining stake in the ETF. The cash value of your stake would show up in your brokerage account and be labeled as if you had placed a sell order yourself.
The bottom line is simple...
Don't let small AUM stop you from investing in an ETF whose strategy interests you.
Good investing,
Marc Gerstein
Market View
Major Indexes and Notable Sectors
# Hld: Bullish Neutral Bearish
Dow 30
-0.57%
2
23
5
S&P 500
-0.67%
98
282
117
Nasdaq
-0.99%
15
57
28
Small Caps
-0.96%
426
972
450
Bonds
-0.83%
Energy
+1.51%
15
5
0
— According to the Chaikin Power Bar, Small Cap stocks and Large Cap stocks have turned somewhat Bearish. Major indexes are mixed.
* * * *
Top Movers
Gainers
FANG
+3.98%
CAH
+3.09%
APA
+2.94%
HAL
+2.57%
SLB
+2.44%
Losers
CTLT
-7.44%
BMY
-6.24%
CF
-4.23%
JBHT
-3.79%
TTWO
-3.58%
* * * *
Earnings Report
Reporting Today
Rating
Before Open
After Close
BBY
HPQ, PVH
No earnings reporting today.
Earnings Surprises
CTLT Catalent, Inc.
Q4
$1.19
Beat by $0.04
HEI HEICO Corporation
Q3
$0.62
Met estimate
* * * *
Sector Tracker
Sector movement over the last 5 days
Energy
+6.03%
Materials
-0.37%
Utilities
-0.91%
Industrials
-1.93%
Financial
-2.14%
Communication
-2.34%
Staples
-2.39%
Discretionary
-2.49%
Real Estate
-2.61%
Health Care
-3.64%
Information Technology
-4.13%
* * * *
Industry Focus
Mining Services
12
11
10
Over the past 6 months, the Mining subsector (XME) has outperformed the S&P 500 by +6.09%. Its Power Bar ratio, which measures future potential, is Strong, with more Bullish than Bearish stocks. It is currently ranked #8 of 21 subsectors and has moved up 4 slots over the past week.
Top Stocks
CEIX
CONSOL Energy Inc.
ARCH
Arch Resources, Inc.
BTU
Peabody Energy Corpo
* * * *
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