Another Hedge Fund ETF Mistake

Plenty of investors like the iShares Russell 2000 Index Fund IWM. Nearly $22 billion in assets under management indicate as much and that number not only makes IWM one of the largest small-cap ETFs, but one of the largest ETFs of any kind.

Hedge funds like IWM, too. The ETF "trades with a spread about one-tenth of the underlying small-capitalization stocks. It also averages $4 billion in value traded per day — which is about half the entire volume changing hands of the 2,000 underlying stocks ($8 billion)," said Credit Suisse's Phil Mackintosh, according to Barron's.

Indeed, professional investors do love IWM. More than 100 first-quarter 13F filings showed the ETF among pros' top-10 holdings and the fund appeared in 605 filings, according to Whale Wisdom. More pros (288) added to existing IWM positions than were seen lowering exposure to the ETF (229).

IWM is up 16% year-to-date and it is hard to complain about that. However, some small-cap ETFs have been better. Professional investors making mistakes with ETFs is nothing. There are the guys, including one that is quite the poker player, that ought to consider cashing in their chips on gold miners.

Do not forget Jeff Gundlach extolling the virtues of the iShares MSCI Japan Index Fund EWJ in January. That was a good call as EWJ is up 14.6 percent year-to-date. A good call except for the part where the WisdomTree Japan Hedged Equity Fund DXJ has outpaced EWJ by 820 basis points this year.

Investors looking to top the pros that own IWM have options. They do not even have to go out of the iShares family as the iShares S&P SmallCap 600 Value Index Fund IJS has outpaced IWM this year by 60 basis points while being less volatile than IWM. Remember, hedge funds love throw around the term "risk adjusted returns." Well, higher returns with less volatility is usually better than lower than lower returns with more volatility.

Then there is the Vanguard Small-Cap ETF VB, which does battle with IWM for the title of largest small-cap ETF. VB has only slightly outperformed IWM this year, but it has been noticeably less volatile.

Additionally, VB merits consideration for any investor, professional or retail, that expects to hold a small cap ETF for a year or more because the Vanguard offering only charges 0.1 percent per year compared to 0.24 percent per year for IWM.

Then there is the admittedly costlier (0.61 percent annual expense ratio) PowerShares DWA SmallCap Technical Leaders Portfolio DWAS. DWAS is not even a year old and has spent a fair amount of its life with less than $100 million in assets (it now has $124.4 million), which opens any ETF to criticism from the ETF chattering class.

Still, the relative strength factor employed by DWAS has helped the new fund to be a steady performer. Year-to-date, DWAS is up nearly 20 percent.

To be fair, DWAS only holds 200 stocks (IWM holds 1,941) and that higher level of concentration can help on the upside. Additionally, the ETF has average daily volume of less than 80,000 shares. IWM trades an average of 45.6 million shares. Still, in 286 trading day for DWAS from its debut through the end of the first quarter, the ETF only traded at a noticeable premium or discount to its net asset value on five occasions, according to PowerShares data.

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