A Tale of Two ETFs: Small Funds vs. Large Funds

The GlobalX China Materials ETF (CHIM) is now up and running. I had a chance to look under the hood a few days ago and was impressed by the fact that I recognized very few names in the fund.

I made that observation to one of the execs at GlobalX (the one who sent me the index info as a heads up) and he said that the index provider did a good job of populating the fund without overly relying on the mega caps. As a follow up to yesterday's post I would say that materials could be considered as part of the build up and out of the country's infrastructure.

I'm in the process of exploring whether or not to swap a stock out for an ETF of the same theme. There are two ETFs I could choose from; they are both very similar but one's assets are over $1 billion and the other is double-digit millions. The respective volumes are lopsided as well. As it turns out, the slim differences between the two have not mattered performance wise and the smaller one is a little more expensive.

So if I do the swap I'll buy the bigger fund. In this case the choice of funds is unlikely to matter, and an individual investor looking at the same two funds could easily buy 200-500 shares as a position to hold. In order to do the swap I have in mind I would have to buy in the low to mid five figures (share amount) but not enough for a creation unit. It would probably not make sense for me as a small portfolio manager (I mean AUM, not my height) to buy the smaller fund.

In concluding this I had a small epiphany: most portfolio managers looking for access to the space will have no choice from a logistics standpoint but to buy the larger fund, making it very difficult for the smaller fund to ever gain traction. Yes there is an element of stating the obvious here but a fund forced to rely on getting by 300 shares at a time has a good shot of ending up on Ron Rowland's deathwatch. In this light, why would an individual buy the smaller fund? Unfortunately, this makes the case for fund providers avoiding me-too specialty funds altogether, which I do not view as a positive.