Financial Poise
exchange traded funds

Size Should Not Matter: Exchange Traded Funds Selections

[Editor’s Note: Exchange Traded Funds combine some of the diversification features of mutual funds with the opportunities (and risks) of being an instrument that is traded on the stock market. Notably, according to, ETF shares are traded on a national stock exchange and at market prices that may or may not be the same as the net asset value (NAV) of the shares. Author Todd Rosenbluth is director of ETF and mutual fund research at CFRA, an independent research firm. In this article, he evaluates ETFs that are below the billion-dollar mark in terms of capitalization.]

With so many exchange-traded funds (ETFs) to consider in the investing universe, it is tempting to look for ways to narrow the field and keep it simple. Yet by doing so, many strong candidates for an investment portfolio could fly under the radar. The Center for Research and Financial Analysis does both by rating approximately 1,500 ETFs based on their holdings, costs and other fund-focused factors. CFRA aims to arm advisors and investors with these tools to make fully-informed and smarter decisions.

Ensuring Liquidity

In addition to a track record screen, some investors and gatekeepers focus on the market capitalization or assets under management of the fund. This is in part to ensure there is sufficient liquidity to execute trades. However, when focusing on large-cap or multi-cap equity ETFs, there is likely ample ability to create and redeem ETF shares as warranted based on what’s inside.

We ran a screen of equity ETFs that are:

  • rated Overweight by CFRA;
  • at least three years old; and
  • boast assets of less than $900 million (since once a fund hits the billion-dollar asset mark, it generally attracts more investor attention and we would like to bring investor attention to some smaller funds that are also worthy of interest).

Invesco S&P 500 Pure Value (RPV) launched in 2006 and holds approximately 120 stocks with the perceived strongest value characteristics in the broader S&P 500 index. Stocks include Baker Hughes, MetLife, Prudential Financial, and Valero Energy. The ETF charges a 0.35% expense ratio and trades with a tight bid/ask spread according to CFRA. We also like iShares S&P 500 Value (IVE), a broader value portfolio of S&P 500 stocks, but note that IVE is 18 times RPV’s size.

WisdomTree International Equity Fund (DWM) also launched in 2006. The fund’s fundamental focus is a twist on developed international investing as DWM is constructed based on a company’s annual dividend payments and not market capitalization. In addition, the fund holds Hong Kong-domiciled stocks not found in some peers’. A closer look inside reveals CFRA Buy recommended China Mobile, Novartis, Royal Dutch Shell and Roche Holdings among the top-10. DWM charges a 0.48% expense ratio, higher than the larger iShares MSCI EAFE ETF( EFA) and $63 billion iShares Core MSCI EAFE (IEFA).

iShares Morningstar Large-Cap ETF and Others

The iShares Morningstar Large-Cap ETF (JKD), launched in 2004, is more narrowly constructed than many large-cap funds with just 92 holdings. The top constituents include Apple and Johnson & Johnson, as Morningstar considers them to be core stocks, not growth or value. But the portfolio does not hold what Morningstar deems value stocks like Berkshire Hathaway or growth ones like Microsoft that can be found in the $177 billion iShares Core S&P 500 ETF (IVV). JKD’s expense ratio of 0.20% is still modest for an equity ETF.

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About Todd Rosenbluth

Todd Rosenbluth is Senior Director of ETF and Mutual Fund Research at CFRA where he leads the firm’s holdings-based research efforts within the Equity Research and Fund group. Todd publishes regular thought leadership content on equity and fixed income products, maintains the quantitative fund models and supports client needs. He also serves as a member…

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