Bigger Isn't Always Better With ETFs: Part III

We're back with another installment of our five-part series “Bigger Isn't Always Better With ETFs.” Thus far, we've made the rounds with a variety of ETFs, particularly in the commodities and emerging markets asset classes, so this week we're going to see what we can turn up when it comes to smaller index and sector funds that are more worthy of investors' consideration than the larger fund. With sector funds, it should be noted that since many hold the same stocks, often times with comparable weights, their performances move in lockstep with each other. So on that basis, we would opt for the cheaper ETF even if its assets under management are well below a rival ETF. With that, let's look at a few more “bigger isn't always better” candidates. Smaller Can Be Better With Small-Caps The iShares S&P SmallCap 600 Index Fund IJR is one of the largest ETFs tracking U.S. small-caps with almost $6.5 billion in assets under management. The SPDR S&P 600 Small Cap ETF SLY does basically the same thing as IJR with 1% of IJR's AUM total. Both have expense ratios of 0.2%. Or you can opt for the Schwab U.S. Small-Cap ETF SCHA, which is far smaller than IJR. SCHA has an expense ratio of just 0.13% and Schwab clients can trade it commission-free. An Oil Services Battle The iShares Dow Jones US Oil Equipment Index Fund IEZ is a fine option for making a bullish bet on the oil services stocks. Most investors know that, but a compelling alternative is the SPDR S&P Oil & Gas Equipment & Services ETF XES, which holds more stocks than IEZ. XES has $110 million in AUM less than IEZ, but the SPDR offering has slightly outperformed IEZ this year, plus its fees of 0.35% are cheaper than the 0.47% expense ratio IEZ sports. Real Estate Rumble The iShares Dow Jones US Real Estate ETF IYR is a well-known REIT ETF. A nice yield of 4.1% helps and $2.9 billion in AUM shows this ETF is popular among REIT investors. The Schwab U.S. REIT ETF SCHH isn't much different, right? It has just $155 million in AUM and not much in the way of yield. Don't miss SCHH though. It has an expense ratio of 0.13% compared to 0.47% for IYR and SCHH has outperformed the iShares ETF year-to-date. And SCHH is commission-free for Schwab clients. Bull case: Obviously, small-caps and oil services are high-beta groups and it might too early to go running into big positions with the ETFs highlighted here, but keep an eye on SCHA, XES and IEZ for dip-buying opportunities going forward. REIT ETFs should remain less bad as investors remain hungry for dividends. Bear case: Europe continues tumbling, U.S. economic data weakens and investors become convinced the debt situations on both sides of the Atlantic are worsening.