Exchange traded funds have been around in the U.S. for over
two decades. One would think that would be enough time for
professional investors to figure out two important facts
First, no empirical evidence exists to suggest that small
ETFs, often deemed that way for having less than $100 million in
assets under management are "bad." In fact,
ample evidence exists to the contrary
Second, if it is the ETF's underlying holdings that drive the
fund's performance, and it undoubtedly it is, then it is also
those holdings that help determine an ETF's liquidity. A recent
article on sector ETFs that was found on at least on reputable
financial outlet indicates some investors still do not get those
two basic principles.
The writer of the piece claims the PowerShares KBW Property
& Casualty Insurance Portfolio (NYSE:
) is not sufficiently liquid because it has less than $100
million in AUM. He goes on to say "I recommend investors only buy
ETFs with more than $100 million in assets. The fact that 9 out
of the 10 best sector ETFs have over $100 million in assets, and
8 out of 10 have more than $1 billion, suggests that investors
are getting better at identifying the best sector ETFs."
As it pertains to KBWP, the advice is dubious at best because
ETFs with heavy exposure to insurance providers
have been stellar performers this year
. Not to be trite, but the fact that eight of the writer's top-10
sector ETFs have over $1 billion in AUM means no more than that
investors are proficient at pouring money into already large
ETFs, i.e. following the herd.
Yes, KBWP is small. It has just $33.3 million in assets, but
the ETF has provided big returns this year with a gain of almost
17 percent. In the past 12 months, KBWP is up 27.7 percent. Over
the past two years, the ETF has surged 36.5 percent. That is a
lot of alpha to sacrifice just because an ETF is not the most
popular kid at the party.
As for liquidity, the least heavily traded of KBWP's top-10
holdings, a group that accounts for about 57 percent of the
fund's weight, is ProAssurance (NYSE:
). That stock has average daily of about 228,500 shares over the
past three months. Three of KBWP's top-four holdings have average
turnover north of 1 million shares and Chubb (NYSE:
) barely misses that mark at 993,000 shares per day.
Two of the ETF's top three-holdings, Allstate (NYSE:
) and Progressive (NYSE:
) have volume over 3 million shares per day. KBWP's top-three
holdings, which represent 23.6 percent of the ETF's weight, are
up an average of 15.1 percent year-to-date, something to consider
when evaluating the fund's components.
In further proof KBWP is sufficiently liquid, the mid-point of
its bid/ask spread rarely exceeds its net asset value. Rarely as
in almost never. Almost never as in during 2012's 250 trading
days and the 60 trading days in the first quarter of this year,
KBWP's bid/ask mid-point never reached even a 50 basis point
premium or discount,
according to PowerShares data
The reality is the worst thing anyone can say about KBWP is
that it is a small ETF. To each their own, but ignoring all small
ETFs is no guarantee of large returns. KBWP proves as much.
For more on ETFs, click
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