Bigger Isn't Always Better - IndexUniverse.com

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Bigger from page 1 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. 12 10 ETFR • October 2011
ETF Analytics How Do You Find the Right U.S.-Listed ETF? In 2010, the most popular China ETF was also the worst-performing China fund on the market. A lesser-known competitor beat it by nearly 8%. Two emerging markets ETFs track the exact same index, but one delivered a 3% higher return in 2010. ETF Analytics: The Complete ETF Research Solution Institutional-Caliber Research. Quant-Driven Process. Plain-English Analysis. } Easy-to-understand rating system: Efficiency, Tradability, Fit } Reports and research on every U.S.-listed ETF and ETN } Robust “segment” reports comparing ETFs in 300+ different areas of the market; e.g., “Broad-Based China,” “Short-Term Treasurys” } Quant-driven analysis backed by plain-English explanations, making it easy to convey the value to clients } Hundreds of data points updated daily } Proprietary data points on block-level liquidity, fund closure risk and more } Industry-leading ETF classification system ETF Analytics rates, ranks and evaluates every U.S.-listed ETF and ETN on the market. Our goal? Provide institutional-caliber ETF research that helps professional advisors answer the question: “What are the best U.S.-listed ETFs for my clients?” Redefining how investors approach the ETF market. To register for our commercial beta release, contact analytics@indexuniverse.com or +1 415-659-9013. www.indexuniverse.com/analytics ©2011 IndexUniverse, LLC, IndexUniverse ETF Analytics
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Page 4 and 5: Going For The Gold By Lara Crigger
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Page 14 and 15: October 2011 U.S.-Listed ETFs Sorte

Bigger Isn't Always Better - IndexUniverse.com

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