Large Value

After a rough start to the year as the credit crisis pummeled mainstays in this group, (i.e., Financials), value staged its first sustained comeback since last summer. But look a little closer—this is a definite case of "what you see isn't always what you get."

A prime example was the $11 billion-plus Vanguard Value ETF (NYSEArca: VTV). It's a traditional passive market-cap-sized fund that tracks the MSCI U.S. Prime Market 750 Index. VTV has more mid-cap names than the iShares S&P 500 Value Index (NYSEArca: IVE). But going smaller didn't pay off as in the past during this Q3. Mid-cap value funds on the whole fell along the same lines or more—witness the iShares S&P MidCap 400 Value Index (NYSEArca: IJJ) and its 6.55% loss in the quarter. Another well-diversified and widely used mid-cap value fund, the Vanguard Mid-Cap Value ETF (NYSEArca: VOE) also ended with more than a 7.71% drop.

It shouldn't be a surprise, then, that WisdomTree LargeCap Dividend (NYSEArca: DLN) had a bang-up quarter. It had an average market cap nearly 50% greater than IVE. With the increasing volatility and cloud moving back over financials as political bailouts and big-name bank takeovers moved into the headlines to end Q3, a higher dividend yield helped steady this ETF's returns appreciably.

Large Blend

Interestingly enough, SPY—the most heavily traded and elder statesmen of S&P 500 index-tracking ETFs—was a relative underperformer in the category. In fact, the rival iShares S&P 500 Index (NYSEArca: IVV) lost more than a full percentage point less in the quarter—even though both follow the exact same benchmark.

In a quarter as turbulent as what just passed, though, one key stat in this widely held category might be average daily volume. In the past three months, IVV's been around 4.4 million shares, while SPY's averaged around 305.3 million.

In theory, that should work on its behalf. But with credit markets freezing and several large-cap ETFs showing gaps between underlying prices and net asset values in the quarter, a level playing field was lost at times.

"In normal times, SPY's greater liquidity should help. But the third quarter was anything but ordinary," said Joe Clark, managing partner at Financial Enhancement Group LLC.

Still, he notes that as the first ETF, SPY was set up with a bit different structure than most others that came later, such as IVV. That might be a cause of greater tracking error with the wild swings seen in markets of late, although Clark says that over time SPY should do well in tracking the S&P 500.

"We've seen things happen in the third quarter that defy reasonable explanation," Clark said.

Another performance blip showed up between total market ETFs. In the quarter, the iShares Russell 3000 Index (NYSEArca: IWV) outperformed, with a 7.31% total return. But that was 1.61 percentage points better than the Vanguard Total Stock Market ETF (NYSEArca: VTI), which fell 8.94%.

That was significant for such a relatively short three-month period. But unlike with SPY and IVV, these two ETFs follow different benchmarks—VTI uses a so-called "second generation" index with buffer zones and the like developed by MSCI. The IWV goes with a more standard Russell 3000 Index.

Each holds about the same number of stocks in remarkably similar allocations by cap size. So why the big advantage for IWV? Although slight, VTI had a bit more in the hard-hit Energy sector and slightly less in Financials and Health care.

It's important to note that those sector weightings aren't large enough to expect major differences between these ETFs in the longer term. More significant is likely to be IWV's expense ratio (0.20%) compared with VTI's (0.07%). How long that will take to make a dent is still in question, however. In the past five years, total returns for the two are within 0.02 percentage points of one another—with VTI on the losing end.

Also, the Rydex S&P Equal Weight (AMEX: RSP) ETF didn't swoon despite its better-than 45% weighting in mid-caps heading into September. This fund also stuck to its underlying S&P benchmark, meaning stock-picking wasn't at play here. But consider that RSP's top 10 holdings represented around 3% of its assets. Meanwhile, IVV's top 10 comprised nearly 20% of total assets.

Even though both were highly diversified, spreading the risks (RSP's largest name had 0.51%; most others were half that level), definitely paid off for the equal-weighted portfolio in the third quarter.

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