ETFs with More Assets May Be Best

It may be in investors' best interest to favor ETFs that are at the high end of that genre's market capitalization array.

Advantages of ETFs vis-à-vis other modes of fund investments include a tendency of share prices to closely adhere to net asset values throughout the trading day. Besides revealing their portfolio holdings daily and transmitting their NAVs throughout the trading sessions, a mechanism unique to ETFs allows "qualified participants" to reduce or even eliminate the gaps between prices and NAVs using arbitrage.

But the "creation" and "redemption" units used to arbitrage differences between prices and NAVs are typically blocks of 50,000 to 200,000 shares. Small ETFs with trading volumes too thin to accommodate blocks of that size are likely to be more susceptible to chronic disparities between their respective market prices and NAVs.

In addition to premiums and discounts of price vs. NAVs, quotes of thinly traded ETFs are likely to involve relative hefty bid/asked spreads, which raise costs to investors on both sides of trades. ...