TBH, i’m suprised that the exporter converts instances to something usable at all.
Usually all unknown objects are ignored when you export e.g. to fbx.
So Datasmith really seems to be more advanced in this matter.
In the first case it also handles it correctly, because an instance is just like a clone of another object.
The second case however seems to have issues with assigning the material selections during the process of combining the meshes.
For now i guess you have to convert all your instances manually in C4D and combine the meshes before export.
Unless the Datasmith import dialog has a “combine meshes” option just like the fbx importer.
In that case go with the instances in instance mode and use this combine option.