Six popular ETFs covering different parts of the investment universe might best be replaced by six competing funds with underappreciated attributes, IndexUniverse President of ETF Analytics Matt Hougan said recently on CNBC.
“We’re talking about getting the best exposure for whatever you’re trying to target,” Hougan told the CNBC panel, noting that while fees are part of the equation, they are quite often the least significant of the variables that should affect investor decision.
The general problem is that the funds investors are typically most familiar with are the oldest in the space, and that those older ETFs often don’t serve up the best exposure among all the products that have since become available to investors.
CNBC quizzed Hougan on six different fund categories: China, gold, financial ETFs, junk bonds ETFs, dividend-focused portfolios and small-cap ETFs:
Hougan said that the SPDRs S&P China ETF (NYSEArca: GXC) was a far better choice than the more-popular iShares FTSE China 25 ETF (NYSEArca: FXI), despite the fact that FXI has nearly 5X the assets of GXC. FXI mostly holds large, formerly government-owned companies in China, with no exposure to the entrepreneurial tech and consumer segments. GXC offers more comprehensive exposure to the growth in China that investors really want.
Regarding gold, Hougan said the iShares Gold Trust (NYSEArca: IAU) was a better choice than SPDR Gold Shares (NYSEArca: GLD) on the basis of price alone. They both hold gold bullion and IAU costs 0.25 percent a year compared to 0.40 percent for GLD.
Hougan said the iShares Dow Jones U.S. Financial Index Fund (NYSEArca: IYF) is probably a better choice than the hugely popular Financial Select Sector SPDR Fund (NYSEArca: XLF), if for no other reason than XLF focuses so heavily on large banks, while IYF has broader exposure to the entire financial world.
Regarding junk bond funds, Hougan argued that the iShares iBoxx $ High Yield Corporate Bond Fund (NYSEArca: HYG) holds "slightly safer securities" than the SPDR Barclays Capital High Yield Bond ETF (NYSEArca: JNK) and tracks its index more closely too.
In the hugely popular realm of dividend funds, Hougan said the iShares Dow Jones Select Dividend Index Fund (NYSEArca: DVY) gets all the attention because it was the first, but that the iShares High Dividend Equity Index Fund (NYSEArca: HDV) targets higher-yielding stocks.
Finally, in the small-cap stocks space, Hougan said the iShares Russell 2000 Index Fund (NYSEArca: IWM) owns very small stocks and is also subject to Russell's annual rebalancing which "causes a head wind of costs." Hougan singled out the Vanguard Small-Cap ETF (NYSEArca: VB) as a viable alternative.