In the ETF game, size matters. As the exchange-traded products
industry has evolved, professional and retail investors alike
have become more obsessed with numbers. Underscoring the notion
that a herd mentality still permeates financial markets,
investors tend to find comfort in the largest, most heavily
traded ETFs because those ETFs are big and heavily traded.
That is the case despite the fact that compelling evidence
exists to suggest that
bigger is rarely better when it comes to ETFs
Perhaps what is most vexing is that this scenario is not
confined to just one area of the ETF world. The conversation is
not limited to a couple of China ETFs outperforming the iShares
FTSE China 25 Index Fund (NYSE:
) or a fund or two being better alternatives than one of the
sector SPDRs. The examples of
small ETFs turning in stellar performances
are too numerous to completely detail here.
There are some standouts worth examining, though. For example,
the iShares Nasdaq Biotechnology Index Fund (NASDAQ:
) is, by most metrics, a fine ETF. Home to $2.5 billion in assets
under management, the iShares Nasdaq Biotechnology Index Fund is
the largest biotech ETF on the market. It has also performed
quite well this year with a gain of 39.7 percent.
Chances are, few investors - professional or retail - would
complain about making 40 percent in less than 10 months. On the
other hand, those investors, particularly the retail crowd paying
fees to advisors, probably would not be pleased to know that of
the four major biotech ETFs, IBB is the worst performer on a
The fund IBB is closest to in terms of performance, the SPDR
S&P Biotech ETF (NYSE:
), has outpaced IBB by over 300 basis points. The First Trust
NYSE Arca Biotech Index Fund (NYSE:
) has topped IBB by 660 basis points. A biotech ETF that rarely
gets the credit it deserves
, the Market Vectors Biotech ETF (NYSE:
), has jumped almost 58 percent this year in near stealth
Proving that the bigger is not always better argument lingers
across multiple sectors, there is the example of the First Trust
Materials AlphaDEX Fund (NYSE:
). At least this ETF
has drawn some praise
for trumping its rivals.
That is exactly what FXZ has done this year. In 2012, FXZ has
topped the Vanguard Materials ETF (NYSE:
) by 150 basis points and the Select Sector Materials SPDR (NYSE:
) by almost 480 basis points.
Moving on from sector funds, broad market ETFs focused on a
particular cap spectrum also give investors bigger is not always
better examples. Take the case of the Guggenheim Wilshire
Micro-Cap ETF (NYSE:
). That ETF has just $13.4 million in assets under management
compared to $478.6 million for the iShares Russell Microcap Index
Chances are if Joe Six Pack asked his financial advisor to put
him into a micro-cap ETF, the advisor would choose IWC because
its large by assets and has decent volume for these type of ETFs
at almost 80,000 shares per day. Joe would have every right to be
mad at his advisor because the choice means being cheated out of
almost 700 basis points of alpha this year.
Arguably, three examples is enough to make investors wonder if
all they are getting with large ETFs is a security blanket by way
of size. In the process, their returns may be suffering.
For more on smaller ETFs that are outperforming, click
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