While some funds, such as the $100 billion SPDR S&P 500 ETF
(NYSEArca:SPY), get all the love because they're the closest thing
to household names that the exchange-traded fund industry has to
offer, that doesn't make them the best option for investors,
IndexUniverse President of ETF Analytics Matt Hougan told CNBC.
Stressing that just because investors gravitate toward the
biggest and most well-known ETFs doesn't mean they should follow
the herd. Look closely and understand what you're buying, the
IndexUniverse executive said.
"The thing about SPY is that it was the first ETF-you never want
to buy the first-generation product," Hougan said in an appearance
on CNBC this week. "SPY is structured as a grantor trust, which
means it can't reinvest dividends."
Hougan noted that SPY competes head-to-head with the iShares
S&P 500 Index Fund (NYSEArca:IVV), which doesn't suffer from
the same structural restrictions regarding reinvestment of
dividends.
"That means it always holds onto a little bit too much cash, and
in rising markets like we've seen, you'll see IVV slowly but
steadily outperform SPY," Hougan said. "If you're talking about two
things that do the same thing, why not choose the one that has the
better performance?'
JJA, Not DBA
Hougan also questioned whether the $2 billion PowerShares
Agriculture ETF (NYSEArca:DBA) was the best choice, since competing
products are outperforming it.
"It's getting outperformed by about 15 points by JJA," Hougan
said, referring to the iPath Dow Jones UBS Agriculture Total Return
ETN (NYSEArca:JJA).
Hougan said BA's performance has been hampered by a relatively
large exposure to livestock, while JJA's returns have been boosted
by large exposure to grains, which have benefited from dry weather
in the U.S. Midwest.
He also stressed that JJA has clear tax advantages over DBA,
with DBA owning futures contracts that are taxed each year on a
"mark-to-market" basis, regardless of whether positions are
sold.
"With the ETN, JJA, you don't get taxed until you sell the
product,' Hougan said.
Beware VIX-Related ETNs
Hougan also cautioned investors from making use of volatility
related products, singling out the $1.67 billion iPath S&P 500
VIX Short-Term Futures ETN (NYSEArca:VXX).
"VXX has been and will be and almost forever will be an
incinerator for investors' money," Hougan said, noting the ETN is
down 80 or 90 percent over the past few years.
He noted that VXX "has completely distorted the market for
volatility futures, in part because of the contango problem
associated with futures-based investments.
Contango is the condition when futures contracts prices grow
pricier over time, meaning investors have to pay up to maintain
exposure in a given market, which erodes significantly over time.
Hougan said this so-called roll cost on volatility futures can be
as much as 180 percent of the security's actual price over a year's
time.
PZA And VDC
In the municipal bond space, Hougan said he preferred the
PowerShares Insured National Municipal Bond (NYSEArca:PZA) over the
iShares S&P National AMT-Free Municipal Bond
(NYSEArca:MUB).
He said PZA has less exposure to California than does MUB, and
also stressed that PZA's entire portfolio is insured and that its
holdings favor revenue bonds over general obligation bonds, which
he said have performed better than general obligation bonds over
the past few years.
Finally, Hougan said he favored the Vanguard Consumer ETF
(NYSEArca:VDC) over the Consumer Select SPDR Fund
(NYSEArca:XLP).
Hougan said VDC is more diversified than XLP, holding 108
companies to XLP's 40 largely multinational names.
"It holds a lot of the things that are in yours and my
cupboards; if you want exposure to more domestic consumer staple
names, VDC gives you that with the same low cost and same
liquidity."
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