Matt Hougan, IndexUniverse's global head of content, has had
a ringside seat in the ETF industry for years. In this
once-a-month feature, IU editors and writers sit down with him to
share with our readers some of his thoughts and insights in the
This month, IndexUniverse.com Managing Editor Olly Ludwig
caught up with Hougan for a chat about what to look forward to
for the rest of 2013, specifically the outlook for fixed-income
and emerging market ETFs-two of the worst-hit asset classes in
June, as investors headed for the exits amid worries about rising
IndexUniverse.com:The last time we spoke, you talked
about the WisdomTree Japan Hedged Equity Fund (NYSEArca:DXJ) and
Japan being the biggest surprise of 2013 so far. What do you
think is likely to be the biggest surprise for the rest of the
I'm not a market forecaster, so no one should pay attention to what
I say. But I'm fairly dovish on the outlook for fixed income. I
think the expectations that that market will fall off a cliff
immediately are probably overblown. I think what will be surprising
the remainder of the year is a generally bullish trend in equity
In terms of the ETF space, there are a few things going on that
I find extraordinarily interesting that I think will continue. One
is that even though Pimco has lost assets in the Pimco Total Return
ETF (NYSEArca:BOND)-and a lot of people have made a big deal out of
that-they've gained huge flows into their short-term funds, be it
the Pimco Enhanced Short Maturity Strategy ETF (NYSEArca:MINT) or
their short-term bond strategy.
I think that suggests that a lot of the assets coming out of
BOND are just shortening up on duration and staying within the
Pimco family-a sort of brand loyalty in the bond space, which is
Those short-term, fixed-income products that give you an
enhanced yield are a place investors and advisors want to be right
now-that may be what the biggest surprise of the second half of the
year will be:continued growth of the short-term, enhanced-yield
products like MINT and like Pimco's short-term corporate bond ETF;
like the short-term, high-yield muni stuff; and like the
PowerShares Senior Loan Portfolio (NYSEArca:BKLN).
IU.com:You're talking about a general interest in
holdings on the short end of the yield curve in the context of
rising rates rather than, say, a new interest in alternative
cash-equivalent proxies as it relates to what's going on with
money market funds at the SEC right now?
Yes, absolutely. I see fixed-income investors shortening up on
their duration, but not doing it in a plain-vanilla way. The
classic rotation would be out of long-term Treasurys and into
short-term Treasurys. I don't see that happening so much as I do
out of long-term Treasurys and into things with short duration, but
with enhanced credit risk that can lead to higher yields.
It's a relatively easy conversation for advisors to have with
their clients. They can sit down and say:"We're going to shorten up
on your duration, protect you from rising rates, but we're going to
take a little bit more credit risk because the economy is doing
well, and corporate defaults are still at an all-time low. As long
as we monitor the position, we can get a little bit more juice
without taking on too much extra risk."
IU.com:What do you make of these "defined maturity"
corporate bond ETFs-some with longer duration-in the Guggenheim
and iShares families? Are those products you take seriously as a
way to manage interest-rate risk?
Absolutely. I love those products.
The big thing investors will realize about fixed income-not
necessarily over the next six months, but over the next two to
three years-is that they'll have a sort of wake-up call on the
total return aspect of a fixed-income ETF. If you buy a
Treasury bond today, you actually don't really care what happens to
it over the next five or 10 years until it matures.
It has really little bearing on your pattern of returns. You get
your interest payments along the way that you know about, and you
get all your money back at the end. And that's all that matters.
Anything else that happens in the interim is noise. Investors have
been embracing that noise for the last 30 years because interest
rates have gone in one direction, and that total return has
enhanced their returns.
But as interest rates start to turn, the
concept of a bond-where you put money down and you get all your
money back and, in the interim, you get interest payments that you
can count on-I think investors will find increasingly appealing.
And these target-date maturity ETFs are a perfect match for that
So as the total return of bonds starts to go the other way, I
think some of that fixed-income money goes into those products.
That's why we see iShares coming to the market with such aggressive
pricing-10 basis points-they're really trying to capture this
market because it's the right product at the right time.
IU.com:Let's talk about emerging markets. They've
definitely taken it on the chin. There's some concern that the
bloom is off the rose and the great run is over. But there are
others who say the recent sell-off in the emerging markets has
set up the most prospective opportunity in the investment markets
since the great crash of '08 and '09. What's your sense about it
It's been a disaster. There's no way around that. The iShares Core
MSCI Emerging Markets ETF (NYSEArca:IEMG) was one of my five ETFs
to start the year. If there's ever a reminder that I should stick
to index investing, there it is.
I read a really good piece on emerging markets by Tyler Mordy
that's coming out in the September/October issue of the Journal of
Indexes. His position was that the driving trend in emerging
markets has shifted. For years and years, returns were driven by
exports to developed economies, and therefore, the countries and
companies that did well were export-oriented.
But as global growth has slowed and developed economies have
devalued their currencies and have gotten a bit of a competitive
edge, those export-driven businesses are suffering. But what are
not suffering are the consumer-directed economies within the
So if you look at something like the EGShares Emerging Markets
Consumer ETF (NYSEArca:ECON), on a one-year basis, that fund is up
about 15 percent. Emerging markets are flat, but ECON is up 15
percent. It hasn't kept pace with SPY, but it's doing a heck of a
lot better than EEM.
I think Mordy is right that there may be a rotation into
companies that benefit from the real and true growing wealth of the
consumer class in emerging markets versus the historical investment
paradigm that's focused on export-oriented companies.
IU.com:What do you think about the historical opportunity
that belonged to the emerging markets now moving to the frontier
markets? I'm thinking of the iShares MSCI Frontier 100 ETF
(NYSEArca:FM). It's probably the purest frontier markets ETF
to-date. But are there too many caveats in those markets or even
in the structure of that security?
I'm a big fan of that security, and it has certainly performed well
since its launch. Year-to-date, it's up about 10 percent-not that
far off SPY. I think there's strength in frontier markets and I
think there is opportunity there.
One thing to take into account, of course, is that the two
biggest countries in the index are graduating. MSCI is promoting
Qatar and the United Arab Emirates to emerging markets next year,
and those two countries together are about 32 percent of the index.
So the frontier markets ETF, FM, is going to get a lot more
. It will have a lot more Nigeria and less UAE. And that means
what's already a volatile market is going to become more
I think frontier has a place in every investor's portfolio-it's
a small place, but the demographics are there and the economies are
there and those markets are doing pretty well. It's bullish, but if
it already was the "Wild West," once those two countries graduate,
it's going to be the "Wild Wild West!"
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