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cate to a fixed income fund are credit risk
and duration.
Since we’re talking about short-term
Treasurys, the appetite for credit risk is clear:
zilch. That leaves only duration, or the sensitivity
of a fund to changes in interest rates.
SHV—despite the cute ticker—has a much
higher duration than its smaller peer, the
iShares Barclays Short Treasury Bond ETF
(NYSE Arca: SHV): 1.79 vs. just 0.36. SHV’s
mandate is to invest in Treasurys with less
than 12 months to expiration.
Is SHV right for everyone? Of course
not. Its short-term focus means its 30-
day SEC yield is actually negative (-0.05
percent), compared with the whopping
Figure 1
Crude Oil Challenge: DBO Vs. USO
Percent Change
20
0
-20
-40
-60
-80
S
2008
M
2009
Source: Bloomberg. Data as of 09/06/2011.
positive 0.08 percent payout on SHY. But
for the short term, SHV’s shorter maturities
have reduced interest rate risk, which
means people who are solely looking to
park their cash have less to worry about.
Crude Oil: USO Vs. DBO
No ETF better illustrates the folly of following
AUM than the United States
Oil Fund (NYSE Arca: USO). The fund
dominates the crude oil ETF space, with
more than $1.5 billion in assets, all of it
plainly invested in crude oil futures. Unfortunately
for USO, its most distinguishing
factor—besides its popularity—is its
worst-in-class (for investors) strategy.
USO’s main issue is that it invests strictly
in near-month contracts. Unfortunately, for
most of the past few years, the front end
of the futures curve has been heavily impacted
by contango—the situation where
prices for out-month contracts are more
expensive than prices for near-month contracts.
According to HardAssetsInvestor.
com, as of Aug. 29, 2011, the level state
of contango in the WTI crude market cost
investors the equivalent of 4.44 percent a
year (assuming the market maintains its
current shape). USO is a great tool for trading
oil, as it’s very sensitive to short-term
moves in WTI oil prices. But long term, the
level of contango in the market has been a
steady detractor for returns.
Some alternative ETFs in the crude
oil space address the issue as best they
S
M
S
2010
■ DBO Equity ■ USO Equity
M
2011
can. For instance, the PowerShares DB
Oil Fund (NYSE Arca: DBO) invests in
contracts that undergo the least damage
from contango. While it still provides
pure exposure to WTI crude oil
contracts, it uses a rules-based methodology
to select exactly which contracts
it will enter into, which dampens the
effects of markets in contango. DBO’s
strategy has been good for a 24 percentage
point improvement in returns
over USO during the past three years.
Energy Stocks: VDE Vs. XLE
It might be equity ETFs that are easiest
for investors to write off as basically being
all the same. People assume that if
you’re just an index fund tracking, say,
S
energy stocks, there’s not much difference
between you and the competition.
It’s usually not that simple though. Indexes
differ markedly in the depth and
size of their holdings and their weighting
strategies, which adds up to funds with
some pretty different characteristics.
Take a look at two of the big energy
sector funds on the market, the Energy
Select Sector SPDR (NYSE Arca: XLE)
and the Vanguard Energy ETF (NYSE
Arca: VDE). The SPDR fund is the biggest
energy fund, with $8.5 billion under
management. It does its job well, and
certainly cheaply at just 0.20 percent a
year in annual fees. But the Vanguard
fund, with $1.9 billion in assets, has
much more comprehensive coverage of
the sector. The fund has roughly an extra
100 names in its portfolio, which means
more exposure to small-cap companies
and more diversification.
Gold Bullion: GLD Vs. IAU
When it comes to physically backed gold
ETFs, there isn’t a whole lot to tell funds
apart by. Unlike the more nuanced world
of stocks, bonds and futures contracts, at
the end of the day, physical gold funds
hold the same exact thing: gold bars.
Every physical-gold ETF works essentially
the same way. Each has a few pallets
of pure gold bricks stored in a bank vault
or bank vaults somewhere. The names of
the banks and their locations differ, but the
ETFs provide exactly the same exposure—
namely to the spot price of gold. That simplifies
the calculus of selecting an ETF quite
a bit; since the exposure is identical, you
might as well pay as little as possible for it.
Investors following AUM alone would
buy the SPDR Gold Trust ETF (NYSE
Arca: GLD), which recently spent a few
days as the largest ETF in the world and
currently has about $75 billion in assets.
But that fund charges 15 more basis
points per year in fees than the iShares
Gold Trust (NYSE Arca: IAU). Generally,
management costs are just one of many
considerations when selecting an ETF,
but with physical-gold funds, there isn’t
much more to go on. The usual caveat
is trading costs, but IAU now has more
than $8 billion in assets, and trading
costs between the two funds for most
investors are similar.
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10 ETFR • October 2011