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Exchange-traded funds are hugely popular with investors, which means ETF companies can’t crank out new funds fast enough.

And so, we have more than 1,000 ETFs listed on the Toronto Stock Exchange, an increasing number of which are small funds that have yet to find a big following. A reader recently asked about the risk of owning one of these funds: “What is the investment risk involved in an ETF, performing very well but the amount of funds under management is only $43-million?”

First off, it has to be pointed out that good returns will very likely catch the eye of investors and advisers. If we check back in a year, it’s quite possible this fund will have grown substantially and be a fixture in its company’s lineup.

But, as a recent ETF industry development shows, maybe not. Sometimes, an ETF company seeking economies of scale will wind up a tiny fund or merge it with a larger product in the company’s lineup.

In researching the Canadian dividend instalment of the 2021 Globe and Mail ETF Buyer’s Guide, I came across the CI First Asset Morningstar Canada Dividend Target 30 Index ETF (DXM-T). Returns for this fund were quite good, but the asset base was tiny at $11-million or so.

It appears the small size of the fund was an issue because, as of April 16, it was to be rolled into the larger CI WisdomTree Canada Quality Dividend Growth Index ETF (DGRC-T). Now, DGRC has strong returns itself over the past one- and three-year periods. But DXM was a little better.

A lesson for investors holding tiny ETFs: You may find that a fund working well for you could be rolled into something else that may not suit you as well. If a small fund isn’t performing well, it’s all the more likely to be merged or wound down (investors get the net asset value on the windup date if they don’t sell before that).

One more small-fund risk to consider is liquidity. A large, heavily traded ETF means just a penny or so between the price buyers are bidding for a stock and the price sellers are asking. Smaller, overlooked ETFs may have a bigger bid-ask spread, which can theoretically result in you having to accept less than the market price for your ETF when you sell, or paying more than the market price when you buy.

There are more than enough big, liquid ETFs to build the portfolio you need. But if you do find a small one that you must have, remember that some small ETFs grow to be stars and some fail the audition.

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