As the ETF industry has exploded onto the scene in recent years, sponsors have aggressively launched funds in an attempt to gain market share. While many of these new ETFs have attracted sufficient investor funds to justify continued operation, some have failed to garner a level of investment necessary to support an active, liquid market and been shuttered. And then there are those that remain in business but are cited as having "insufficient liquidity." Although there are certain rules of thumb – assets under management (AUM) of $25 million and daily volume of 25,000 are often cited as “liquidity thresholds” – there is no hard evidence to support these guidelines. In an effort to determine where illiquidity ends and an active market begins, I analyzed the impact of size and daily volume on the liquidity of various ETFs.

To start, I divided ETFs into six baskets based on three-month average daily volume:

Launching bets on a worldwide recovery is not something I would recommend at this time. I have placed selective bets on a few stocks with generous dividends that are well-covered by profits in stable industries and the ETFs of various non-junk bond portfolios such as Vanguard Short-Term Bond ETF (BSV), iShares IBox Investment Grade Corporate Bond Fund (LQD), iShares S&P U.S. Preferred Stock Index Fund (PFF), PowerShares Financial Preferred Portfolio (PGF), iShares Lehman 1-3 Year Treasury Bond (SHY), iShares Lehman TIPS Bond Fund (TIP) and SPDR Lehman International Treasury Bond Fund (BWX). As mentioned in a previous post, I also like Fidelity's Strategic Income Fund [FSICX].

I also am gradually - very gradually - adding to ETFs in three countries that are likely to be leaders in the eventual recovery. These are the iShares MSCI Switzerland Index Fund ETF (EWL), iShares MSCI Singapore Index Fund (EWS) and the iShares Morningstar Large Value Index Fund (JKF) of U.S. companies.

Tortoise and Hare: Growth ETFs Outpace Value

It's doubtless that you've heard as many times as I have over the last few weeks various financial advisors touting large caps, generally, and large cap industrials as the place to be at this point in the economic cycle. More recently, I've also taken great interest in the growing debate regarding bottom fishing in value. Recently, SeekingAlpha ran a story written by the folks at Bespoke Investment Group. That article offered some evidence that "the rally in growth stocks has come to a grinding halt… as value stocks have taken back the reigns of outperformance".

If we are inclined to play into either (or both) of these supposed trends, which options have we? According to this review, we are allowed to purchases ETFs tracking the following, ex-international: 1) Industrials; 2) Large Cap; and, 3) Value, of small-, medium-, and large-cap persuasions.

This has been a challenging year for big-cap value investors. The Wall Street Journal today highlighted this fact in an article [$] which began: "Name a big-company stock you didn't want to own this year, and there's a good chance it's in the portfolio of your large-cap value fund."

The article goes on to explain that the average value fund is down 2.6% this year, but many well-known and well-regarded funds are showing double digit losses. I would submit that financial stocks may be a good portion of the problem. I remember thinking earlier this year that many of the financial stocks looked very cheap. Bank of America (BAC) looked cheap when I bought it at $51 back in May. The P/E was quite reasonable at the time and I figured that the divided yield (around 5%) would help the stock hold that level. I and probably other value investors were greatly surprised by the impact the sub-prime meltdown would have on BAC and financial stocks.

iShares Broad/Total Market Growth & Value ETFs
iShares Russell 3000 Growth Index Fund (IWZ)
iShares Russell 3000 Value Index Fund (IWW)

After thinking about this, it does make some sense. Large cap growth stocks were the darlings of the the last bull market which resulted in extremely high valuations for the group. Since then the group has been "sleeping off the party of the nineties."

Explains Sharpe:

In recent years, some researchers have concluded that the expected returns on some factors may not depend wholly on their beta values. Prominently, Fama and French (1992) have studied the performance of portfolios of securities grouped on the basis of market capitalization and price-to-book ratios… Fama and French find that relative to their beta values, small stocks seem to have performed better than large stocks and that (value) stocks seemed to have performed better than (growth) stocks. (page 196)

We've moved well beyond that. There's been much discussion of sector funds and other exotic ETF categories such as currency funds, commodity funds and so forth. The simple one-step decision is gone even for those who are inclined to stick with a traditional style, such as value. Moreover, there can be a conspicuous performance penalty for making the wrong decisions.

I recently liquidated my shares in this ETF. It has NAV of $30.72, total net assets of $208,903 and 6,800,000 shares outstanding. It has 13.95% in banks and 13.82% in energy. The rest of its portfolio is divided up equally in capital goods, pharmaceutical goods, and to a smaller extent in utilities and insurance.

Compared to the Morningstar Large Value ETF (JKF), EWQ is underweighted in financial services. JKF is 37% weighted in financial services, 22% in energy, and equally in health care, consumer goods, telecommunications and utilities, with an NAV of $77.87, 4,000,000 shares outstanding.

Any ETFs or Closed-End Funds that we haven't covered that you think we should? Leave a comment below.