While ample evidence exists to support the assertion that some
outperform larger equivalent and deliver impressive returns,
small ETFs have an
abundance of critics
These naysayers often, and erroneously so, focus on
$100 million in assets under management
being the barometer of whether an ETF is "good" or not. To this
day, there is no empirical evidence to support the notion that
ETFs with over $100 million in assets under management generate
As S&P Capital notes, "there are a number of ETFs with
asset bases below $100 million that are ranked favorably" by the
research firm. However, investors do need to acknowledge some
important issues with small ETFs, including often higher bid/ask
spreads that are found with diminutive ETFs.
"Less frequent trading can lead to wide bid/ask spreads, which
is the gap between the price buyers are willing to pay for shares
of an ETF and the price sellers are asking," said S&P Capital
IQ in a new research note. "The wider the spread, the bigger the
bite taken out of investors' returns every time they buy or
S&P pointed to the PowerShares Fundamental Pure Small Core
) as an example of a small ETF with unfavorable cost factors.
PXSC has a net expense ratio of 0.39 percent, but S&P said
the fund's small asset base ($14.6 million) and low average daily
volume (about 1,950 shares) contribute to a less-than-bullish
view of the fund.
S&P favors the large and heavily traded iShares Russell
2000 Index Fund (NYSE:
) over PXSC. IWM, which has $19.3 billion in assets under
management, charges an annual fee of 0.25 percent. S&P has
rates IWM Overweight, but has an Underweight rating on PXSC.
The RevenueShares Navellier Overall A-100 Fund (NYSE:
), which ranks its 100 holdings by revenue rather than market
capitalization, also caught S&P's eye. The research firm
pointed out RWV has an expense ratio of 0.6 percent, just $7
million in AUM and is thinly traded, contributing to wide bid/ask
spreads and a Marketweight rating.
As alternative to RWV, S&P highlighted the $203.1 million
PowerShares S&P 500 High Quality Portfolio (NYSE:
). SPHQ tracks an index that selects S&P 500 members for
inclusion based on long-term dividend and earnings stability.
SPHQ is home to 136 stocks, including Procter & Gamble (NYSE:
), Walt Disney (NYSE:
) and PepsiCo (NYSE:
). S&P rates SPHQ Overweight.
"The ETF holds stocks with above-average S&P Quality
Rankings of A- or higher (based on their strong earnings and
dividend consistency and growth)," said S&P Capital IQ in the
note. " SPHQ is not only more diversified than RWV, but also has
favorable cost factors. SPHQ trades over 45,000 shares daily and
has a tight bid/ask spread. In addition, the gross expense ratio
of 0.49% (netexpense ratio of 0.29%) is much more reasonable than
For more on ETFs, click
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