Chips are very small pieces of wood that are great for small, quick bursts of smoke. Chips, even soaked in water will burn up pretty fast, create smoke and then disappear. If you are not smoking for a very long period of time or if you only want a small amount of smoke flavor then go with chips. Also make sure you have read the instructions for your smoker. Some electric and gas smokers are designed to only handle wood chips.
Chunks on the other had are large pieces of hardwood. Usually less than 2 inches, these pieces are best for creating smoke over a longer period of time. If you are smoking for a while then its best to use chunks. Youll get more smoke and you will get it over a longer period of time without having to run out and add more every 30 minutes.
Whether you are using chips or chunks you want them to not burn away too quickly. This creates intense bursts of smoke that can make food bitter. By soaking wood in water for about 15 minutes for chips and 30 minutes for chunks you can slow down the combustion and lengthen the time in which the smoke is created. Make sure you let the wood drip dry for a few minutes before you add it to the fire. You want the wood moist, not dripping wet.