Bigger Isn't Always Better With ETFs: Part I
First things first. ETFdb ran a fine piece last week regarding 25 things financial advisors should know about ETFs. Number four on that list was “Bigger Does Not Equal Better.”
That's true in many facets of life, but especially when it comes to ETFs. Sure, a fund's assets under management are an important statistic to consider. If nothing else, a robust AUM total indicates that ETF will not find its way to the ETF dumpster anytime soon.
However, a big AUM haul does not ensure noteworthy performance. In fact, an ETF's AUM total can be downright misleading because it can indicate that ETF was simply first to market with its concept or that it has the lowest fees, not that it's the top performer.
Let's have a look at some ETFs where bigger isn't always better.
iShares MSCI Japan Index Fund (NYSE: EWJ): As we already noted today, the iShares MSCI Japan Index Fund is big kahuna of Japan-specific ETFs with over $6.1 billion in AUM. That's flashy, but take your pick of mid and small-cap ETFs that focus on Japan and you'll have no problem finding a fund that has easily outperformed EWJ this year. To boot, those ETFs might be better bets on a Japanese economic recovery than EWJ, too.
iShares MSCI South Korea Index Fund (NYSE: EWY): Alright. We know what you're thinking. We beat this example like a dead horse, but hey, EWY is down almost 8.5% year-to-date while the IndexIQ South Korea Small-Cap ETF is slightly positive on the year. That's a noteworthy difference.
Energy Select Sector SPDR (NYSE: XLE): The Energy Select Sector SPDR has over $7.5 billion in assets under management and to its credit, the ETF is slightly higher this year. On the other hand, if you're willing to get involved with a more volatile ETF, the SPDR S&P Oil & Gas Exploration & Production ETF (NYSE: XOP) is up even more year-to-date while boasting “just” $821.1 million in AUM. Plus, XOP often has the richer options premiums, which is good news for options sellers.
SPDR S&P Emerging Markets Small Cap ETF (NYSE: EWX): No, 2011 has not been kind to the combination of emerging markets and small caps. That much is clear by the 23.2% slump in EWX, which has over $884 million in AUM. With a better yield, the WisdomTree Emerging Markets SmallCap Dividend Fund (NYSE: DGS) has outperformed EWX. Plus, DGS has a slightly lower expense ratio.
Consumer Staples Select SPDR (NYSE: XLP): Among staples ETF, the Consumer Staples Select SPDR is clearly king. Nearly $5.7 billion in AUM says as much. And a gain of roughly 7% is arguably royal in its own right. Then again, the far small PowerShares Dynamic Food & Beverage Portfolio is up 10% year-to-date.
Bull case: Three of these pairs clearly require the high-beta trade coming back on and staying on to generate alpha. Small-caps will need to take part in that for several of these ETFs to make gains through year-end.
Bear case: Emerging markets fall completely out of favor and investors pass on staples names in favor of boring bonds.
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