Market Overview

Two Sub-$100M ETFs That Have Outperformed Larger Rivals

An old issue within the ETF industry still has not gone away and it is unfortunate.

That being the notion that ETFs with less than $100 million in assets under management are the devil's children. Well, that is an exaggeration, but plenty of so-called experts treat small ETFs as if these funds have been branded with scarlet letters.

There are multiple problems with the vilification of sub-$100 million ETFs. First, there is no empirical evidence to suggest an ETF is better with $100 million in assets than it was when it had $90 million. Second, there is enough ill-informed fear-mongering going on with ETFs that another, unproven issue out in the marketplace is destructive, not productive. Third, and most importantly, there are returns.

As in small ETFs frequently offer stellar returns. In the first quarter of 2012, six of the 10 best non leveraged ETFs had less than $100 million in AUM at that time. Through the first half of this year, three of the top-10 non-leveraged funds were members of the sub-$100 million club.

With that in mind, here are three ETFs with less than $100 million in assets that have been outperforming larger rivals this year.

FlexShares Quality Dividend Dynamic Fund (NYSE: QDYN)
The FlexShares Quality Dividend Dynamic Fund could be assailed by the naysayers on two fronts. QDYN is new having debuted last December and has less than $6 million in AUM. Those factors would add a third criticism to the mix, that being liquidity issues. Well, it is not a stretch to say investors will not have a hard time getting decent fills on an ETF that holds 216 U.S. large-caps such as Wells-Fargo (NYSE: WFC), Altria (NYSE: MO) and Exxon Mobil (NYSE: XOM).

Despite is diminutive status, QDYN surged 18.6 percent through July 2, slightly outpacing the Schwab U.S. Equity Dividend ETF (NYSE: SCHD).

Another issue for investors to consider is that SCHD, like so many other popular dividend ETFs, uses length of dividend increase streak as a screening criteria. In the case of SCHD, companies have to have 10-year dividend increase streaks to be included in the fund.

Unfortunately, the yields on some of these ETFs are nothing to write home about. SCHD is decent with a distribution yield of 2.63 percent, but QDYN has a weighted average yield of almost 3.3 percent.

PowerShares Dynamic Healthcare Sector Portfolio (NYSE: PTH)
There is no doubt that health care has been a high-flying sector this year, but with so many large, established ETFs tracking the sector, it is not surprising some good funds fly under the radar. Such is life for the PowerShares Dynamic Healthcare Sector Portfolio.

PTH holds 60 stocks and does a good job of mixing together insurance providers, biotech firms, device makers and some traditional blue-chip pharmaceuticals names. The result is a six-month gain of 20.5 percent compared to 17 percent for the Health Care Select Sector SPDR (NYSE: XLV).

PTH may only have $62.8 million in AUM, but the ETF does not suffer from liquidity issues. It is hard to have liquidity problems when heavily traded stocks such as WellPoint (NYSE: WLP) and Celgene (NASDAQ: CELG) are found among an ETF's top-10 holdings.

The proof is in the pudding. In all of 2012, 250 trading days, the mid-point of PTH's bid/ask spread only saw a premium of 0.5 percent to 0.99 percent of the fund's net asset value on one occasion, according to PowerShares data. A similar discount to NAV was seen one time in the first quarter of this year.

Oh yeah, over the the past three years, PTH's underlying index, the Dynamic Healthcare Sector Intellidex Index has outperformed the S&P 500 Health Care Index and the Dow Jones U.S. Health Care Index.

For more on ETFs, click here.

Posted-In: Long Ideas News Sector ETFs Broad U.S. Equity ETFs Short Ideas Dividends Dividends New ETFs Best of Benzinga

 

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