In a year when DXJ has stolen all the headlines, IU's Hougan's favorite new ETF of all is SRLN.
Editor's note: Matt Hougan, IndexUniverse’s global head of content, has had a ringside seat in the ETF industry for years. In this new feature, IU editors and writers will sit down with him at the end of every month to share with our readers some of his thoughts and insights in the world of ETFs.
This month, IndexUniverse.com Managing Editor Olly Ludwig caught up with Hougan for a chat, and they had a lot to talk about, not least the astonishing success story of the WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ). But Hougan also said his favorite new ETF this year is the SPDR Blackstone/GSO Senior Loan ETF (NYSEArca: SRLN), an alternative yield-generating fund that illustrates thoughtful active management clearly still has a role in a world of ETFs thoroughly dominated by index strategies.
IU.com: Do you have a recent favorite ETF?
Hougan: Sure. There have been about 50 funds that have launched this year, and I actually find it an incredibly interesting class. There are a few that I like, and then one favorite. One that hasn’t caught on is the Global X Nigeria Index ETF (NYSEArca: NGE). I’m a big fan of the frontier markets. I think that’s an interesting play. The market may be overheated and the ETF certainly has not gotten traction yet. But it’s emblematic of ETF issuers pushing into the frontier, and offers an interesting new kind of return.
IU.com: That’s not your favorite; that’s just one of them, right?
Hougan: That’s just one of them, yes. I actually like the Credit Suisse Gold Shares Covered Call ETN (NasdaqGM: GLDI). Terrible timing; you couldn’t have picked a worse moment in the last 10 years to launch that product. But the concept of generating income from an asset that otherwise only generates dust is an interesting one. And putting it in an ETN package is actually a very-tax-efficient way to deliver that pattern of returns. I think it will catch on long term.
But my favorite is the SPDR Blackstone/GSO Senior Loan ETF (NYSEArca: SRLN). It’s also the most successful product to launch this year, with $240 million in assets in less than two months, so maybe I’m not saying anything interesting. But I think what we’ve seen from the Pimco Total Return ETF (NYSEArca: BOND) is that in the deeper, darker corners of the fixed-income market, there’s still opportunity for sensible active management. Bond indexes are terribly structured, and as you get into more inefficient corners like senior loans, the opportunity for upside is larger. This is an interesting play on that idea. I think it will be an enormously successful fund, and I bet the performance will be relatively strong as well.
IU.com: Let’s talk about ETNs and AMJ. AMJ went back into a premium this month because of some kind of shenanigans in the options market. I confess AMJ’s premium gets me all worked up. Do AMJ’s problems say anything about ETNs in general?
Hougan: Well, anytime an ETN is capped out on creations, it stops being an ETF and really becomes a closed-end fund. That’s the case with AMJ. It’s at its creation limit; you can’t make more shares of it. So anytime there’s incremental demand, it will trade to a premium, and investors will get hurt when that premium deflates. That problem doesn't extend to all ETNs, because not all ETNs are at their cap and not all ETNs even have a cap. But ETNs are more liable to cap out than ETFs, so there’s more risk there. Anytime one trades to a premium, you should cash out because you know that premium is going to deflate.