Hougan On CNBC: Avoid These Five ETFs

IndexUniverse.com


 

While some funds, such as the $100 billion SPDR S'P 500 ETF (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 (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 (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 (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 (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 (PZA) over the iShares S'P National AMT-Free Municipal Bond (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 (VDC) over the Consumer Select SPDR Fund (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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