There are many good things about being rich, but wealth also brings some problems.  The most obvious problem is how to stay rich in these troubled times.  Less obvious for the wealthy is that they have fewer practical investment vehicles than the average investor.

Just as large institutional investors have a smaller universe of individual stocks they can buy without becoming too big a factor in the security.  Wealthy individual investors and smaller non-profit or institutional investors have a smaller universe of funds they can buy without becoming too big a factor.

There are more established mutual funds of substantial size than there are ETFs of similar size, which argues for mutual funds over ETFs for large investors.  However, for those who wish to be in a listed security for intra-day entry or exit (including using automated stop loss orders to protect against large drops in price), mutual funds don’t work.

With ETFs as client mandate, what does work?

We recently performed an analysis for some of our wealthier clients to identify those ETFs they could use in their portfolios without moving the market when they decide to move their money.

Here is what we found:

We made the arbitrary decision that a client would not want to own more than 0.5% of a fund’s total assets, and would not want to have any position that was more than 0.5% of the fund’s average daily Dollar trading volume.

Our database tracks 832 ETFs.  Of those funds, this is how many can “handle” positions of various sizes based on the above criteria:

• $10 million position: 5 funds
• $5 million position: 12 funds
• $1 million position: 46 funds
• $500,000 position: 76 funds
• $250,000 position: 97 funds
• $100,000 position: 141 funds
• $50,000 position: 197 funds
• $10,000 position: 335 funds.

Those five funds with the capacity to absorb $10 million positions at or under the lesser of 0.5% of assets or average daily trading volume are:

• SPY (S&P 500) — U.S. large-cap stocks
• QQQQ (NASDAQ 100) — U.S. large-cap stocks
• IWM (Russell 2000) — U.S. small-cap stocks
• EEM (MSCI emerging markets) — emerging market stocks
• FAS (Russell 1000 financials)  — 3x U.S. financial sector stocks.

To keep the list in the unleveraged category, we step slightly over our arbitrary limit and add XLF (S&P 500 financials), which can justify about $7.7 million position based on our arbitrary 0.5% screening rule.

click image to enlarge

Screening Results for Most Liquid ETFs

Nearly 500 of the 800+ ETFs (60+%) are not ready for prime time with just about anybody, and only a handful of ETFs are large enough to accommodate an investor who has $50 million to $100 million or more to invest and who wishes to put $10 million into a single ETF position.

It is true that special manual arrangements can be made through brokers to get into a fund without disturbing it.  However, that makes getting out without disturbing the fund a special manual arrangement too, which is not something we would recommend.  There are some times when a quick exit is needed, or an exit is needed at a particular price point, neither of which would be achieved by the special arrangement process.

An alternative to mutual funds (which lack stop loss opportunity) would be to purchase more than one fund with the same or near same objective; or to purchase the maximum liquid size in the fund of choice and then purchase a collection of individual stocks from the holdings of that fund.  That way liquidity can be maintained and stop loss protection can be applied.

Disclosure:  We hold SPY, IWM, and EEM in some managed accounts.

Richard Shaw
QVM Group LLC

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