Risk and Execution · Lesson 4 of 41234
The question
I checked the market risk. What can go wrong with the fund itself?
The idea
- Some risks come from the wrapper, not what it holds:Tracking miss. The fund doesn't deliver what it promises: an index, or a multiple of daily moves. ETFIQ's Promise check marks each fund Delivered, Partly or Missed, with its gap in points.Premium or discount spike. On a given day the price can sit well away from NAV (the basket's worth divided by the number of shares; see Premium and discount). Sell on a discount day and you get less than the basket is worth.Closure. The issuer can close the fund. Holders get a date to sell by, or are paid out in cash. You don't choose the date.
- Each is measured over its own dates.
Worked example
Risk 1: a tracking miss (BITX, 3 months, Aug 11, 2026 to Nov 10, 2026). BITX aims for 2 times bitcoin's daily move.
Points (pts) are percentage points.
| Return | |
|---|---|
| Bitcoin | +16.10% |
| 2x each day, compounded | +29.77% |
| BITX | +25.87% |
The gap: +25.87 − (+29.77) = −3.90 points. On $10,000 that is about $390 less than the daily promise, compounded, would have given. ETFIQ's Promise check, on its own window to Nov 10, 2026: Partly, −3.9 pts.
The yardstick is 2x each day, compounded, so bitcoin's swings are already in it and the gap is the fund's own (Leveraged decay in numbers).
Risk 2: a discount spike (JEDI, Nov 9, 2026). JEDI, a drone and defense theme fund:
- Usual range: within ±0.40% of NAV on 95% of its 27 trading days.
- Nov 9, 2026 close: 0.14% above NAV.
- Days more than 1% from NAV: 1 of 27.
Selling $10,000 of NAV's worth at that close: $10,000 × (1 − 0.0014) = $9,986, or $14 less than the basket's value. On 95% of its days the gap was $40 or less.
Risk 3: a closure (VERS). ProShares' Metaverse ETF:
- Sep 28, 2026: the issuer's filing announced the liquidation.
- Oct 12: last trading day, 14 days later.
- Oct 27: the exchange removed the listing.
Its 1-year total return to Oct 12 was +19.2%. A fund can close after a good year. Issuers also close funds whose assets are too small to cover running costs. ETFIQ keeps a closed fund's page, marked "Closed on", out of rankings.
The common mistake
"If the market moves my way, the fund will too." BITX's market rose, and the fund still kept about $390 less per $10,000 than its own promise. JEDI's basket was worth $14 more than its sale price that day. VERS gave its holders 14 days. Check the wrapper as well as the market.
Check your understanding
Pick an answer to see why. Two of three right passes the lesson.
Answer: B. −3 points. fund minus compounded promise: 17 − 20 = −3. Not D: the gap is measured against the promise, whatever the market did.Answer: C. $19,600. $20,000 × (1 − 0.02) = $19,600. Not B: $19,940 uses the usual 0.3% range, not today's 2%.Answer: D. Little; a fund can close after a good year, for reasons such as low assets. VERS closed after a +19.2% year. Not A: an issuer also weighs the cost of running a small fund, not only its last return.
Takeaways
- Read the Promise check: a gap against the fund's own promise is the fund's doing.
- Check today's premium against the fund's usual range before a large sale.
- Closures can follow good years, so know the date you'd have to act by.