Consequences of owning an illiquid fund

Investing / Portfolios
1

I want to purchase a global, government bond ETF that is CHF hedged.
I cannot find anything with fund size higher than 30M CHF.

I have never traded with such a small fund.
What is your experience with similar fund sizes?
What could I expect?

Is 30M still big enough that I can probably buy and sell shares easily?

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2

ETF liquidity is not same as stocks. In general, the ETF provider will create or redeem units if there is not much trading going on

3

Isn’t this going to create price swings?

4

Normally, lack of liquidity at the wrapper level means bigger spreads.

Lack of liquidity of the underlying can lead to big drops in value or inability to liquidate. See Woodford:

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5

I think it would only affect spreads
The price moved based on underlying securities

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6

Just check the spread, if there’s market makers might not be an issue.

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7

What’s wrong with this one for example?
Xtrackers Global Government Bond UCITS ETF 4C CHF hedged | 13528821 | LU0641006613

8

≈30% of withholding tax from the Luxembourg domicile.
Or do I have incorrect data about this tax?

I think a US based ETF would have 5% WHT, and an Ireland based one is around 12 %.

9

Well, what is your source?

10

This post, the final table.

The withholding tax will be a bit lower than 30% probably. But not much.
I haven’t found better data on Luxembourg domiciled funds.

11

Do your bond funds normally hold stocks? If not, why would this apply. :wink:

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12

Oh that’s a fun oversight from my side

Thanks for pointing this out.

So, what is the WHT for bonds?
Is there any info about this somewhere?

13

For US bonds it is “portfolio interest” in most cases and has 0% WHT regardless of who or where.

Many other countries have similar rules for their sovereign bonds (and some maybe also for corporate bonds).

You can open the annual report of a fund. They often note how much was lost to taxation (an expense). Then you can calculate any taxation rates you want for comparison with other funds (e.g., tax burden on assets, taxation on interest).

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14

There is no withholding tax on distributions from LU funds/ETF (irrespective of the underlying assets held).

The same applies for IE funds/ETF.

It’s a way to promote the funds industry in those countries.

15

Fantastic. Could you please share a source?

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16

I’m working in a bank and see it every day.

For more official information, google will help. You’ll get plenty of information about Irish and luxembourgish funds taxation from an investor point of view

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