Hougan: 10 Great ETFs You Don’t Know (Part 2)

Hougan: 10 Great ETFs You Don’t Know (Part 2)

From low-cost emerging market debt to the ultimate contrarian play, here are five more 'overlooked' ETFs you should know about.

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Reviewed by: Matt Hougan
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Edited by: Matt Hougan

From low-cost emerging market debt to the ultimate contrarian play, here are five more 'overlooked' ETFs you should know about.

Last Friday, I wrote about five "forgotten" ETFs that investors should know about. Here are five more to round out the top 10. (To read the first part of this article, click here.)

Forgotten ETF #5: Vanguard Emerging Markets Government Bond (VWOB)
AUM: $156 million
ER: 0.35 percent
 

It's hard to call any Vanguard ETF "forgotten." The world's third-largest asset manager, Vanguard manages $2.2 trillion and has a sales force that extends basically everywhere. The media follows its every move.

Yet somehow, the Vanguard Emerging Markets Government Bond ETF (VWOB) escaped my notice. I'll be honest: Until I started researching this article, I didn't know that Vanguard had entered the emerging market debt space.

Emerging markets debt somehow seemed un-Vanguardy. It's a niche market with liquidity issues that should occupy, at best, a small portion of the average portfolio. But Vanguard has embraced international bond exposure in recent years, and this fund is steadily gaining assets. It's easy to explain why.

With an expense ratio of just 0.35 percent, VWOB undercuts the most popular emerging market debt ETF—the iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB | B-24)—by 42 percent on fees. EMB charges 0.60 percent in annual fees.

I generally think people get too worked up about expense ratios. Fighting over whether you charge 0.05 or 0.04 percent is silly. But cutting fees from 0.60 to 0.35 percent matters, and it's good to see price competition coming to the emerging market space. This fund deserves to be larger than it is.

For the definitive ETF Analytics Report on VWOB, click here.


 

 

Forgotten ETF #4: db X-trackers Harvest CSI China 300 A-Shares (ASHR)

AUM: $145 million
ER: 0.82 percent

The db X-trackers Harvest CSI China 300 A-Shares ETF (ASHR) burst onto the market last year with a fury of press coverage. As the first ETF providing direct exposure to Chinese stocks listed on the mainland stock exchanges of Shenzhen and Shanghai, it offered a unique take on the world's second-largest economy.

But somehow, asset growth has been tepid.

I find ASHR interesting for two reasons. First, the exposure it provides to China is different from its peers. Compared with the most popular China ETF, the iShares China Large Cap ETF (FXI | B-51), it offers a much more diversified sector exposure, avoiding the massive tilts toward financials, energy and telecom and instead providing balanced exposure.

Compared to our Analyst Pick in the China segment, the SPDR S&P China ETF (GXC | B-40), ASHR offers significantly more consumer-related exposure: 19 percent of the portfolio against 14 percent for GXC.

That's part of the appeal here: ASHR taps into the local consumer economy that is the focus of China's new wave of growth.

Major China ETF Sector Exposures
 ASHRGXCFXI
Financials39.49%30.39%56.02%
Industrials11.99%7.26%0
Consumer Cyclicals10.71%7.22%2.44%
Consumer Non-Cyclicals8.02%6.52%0
Basic Materials7.74%4.07%2.41%
Healthcare6.84%2.53%0
Technology6.20%18.99%9.26%
Energy4.96%12.21%16.01%
Utilities3.19%3.00%0.00%
Telecom0.85%6.52%13.86%

The other reason I find ASHR interesting is because A-shares in China are trading at a discount to foreign-listed shares for the first time, essentially, ever. Hang Seng Indexes puts out a great index that compares the valuations of stocks listed both in Hong Kong and on mainland China.

Historically, A-Shares have tended to trade at a sharp premium. If the Chinese economy recovers, I suspect they might again.

Hang_Seng_China_AH_Prem_Index

I'm not suggesting investors rush out to replace funds like GXC with ASHR. ASHR has higher costs and lower liquidity, and misses out on critical technology firms that list in New York. But it's definitely a fund to keep an eye on if you want consumer exposure to the Chinese market.

For the definitive ETF Analytics Report on ASHR, click here.


 

 

Forgotten ETF #3: Horizons S&P 500 Covered Call ETF (HSPX | C-82)

AUM: $27million

ER: 0.65 percent

 

I love covered-call strategies. You buy a basket of stocks like the S&P 500 and write calls against them. You collect premium income by selling the calls, which provide a cushion against downside moves in the index.

The dominant covered-call ETF is the PowerShares S&P 500 BuyWrite Portfolio (PBP | C-55), which has been around since 2007 and has $250 million in assets.

HSPX takes PBP's strategy and tweaks it. Like PBP, it holds a portfolio of S&P 500 stocks. But while PBP sells "at the money" calls, HSPX sells them "out of the money." That means HSPX will capture more of the upside movements in the S&P 500 than PBP, while producing a little bit less income.

 

That's an interesting trade-off. It makes HSPX a more reasonable replacement for core S&P 500 exposure for risk-sensitive investors.

In bear markets, HSPX should outperform the S&P 500, as the premiums it collects will cushion the downside. In flat or slowly rising markets, it will outperform as well, as it will capture both the premiums and have scope to capture some upside movement in the stocks. The fund will lag in sharply rising markets, but that's perhaps less important, as it will still go up at a nice clip.

PBP always struck me as too conservative for most investors. It sacrifices essentially all the upside in the equity markets and focuses only on the premiums from the options sales. HSPX straddles the line between equity and options exposure nicely, and as such, fills a very nice niche.

For the definitive ETF Analytics Report on HSPX, click here.


 

 

Forgotten ETF #2: Global X Nigeria ETF (NGE | F-52)

AUM: $13 million
ER: 0.68 percent

There are all sorts of reasons to run away screaming from the Global X Nigeria ETF. The fact that we rate it an "F" in our ETF Analytics system is one example. The fund is small and we rate it as having a "High" risk of being closed by its issuer. It trades irregularly and at extremely wide spreads, with average spreads of 1.32 percent. Only about $121,000 of NGE trades hands every day.

And yet …

People who know me know I'm a big fan of frontier markets. I think they're the last bastion of true diversification in an increasingly globalized world. And while I don't think they should represent a big portion of an investor's portfolio—in fact, the median investor allocation should probably be zero—for investors willing to take on big risks, they can be interesting.

Nigeria is an interesting economy. It's now the largest economy in Africa (bigger than South Africa). It's growing at 7 percent a year. It has a population of 160 million and massive oil reserves. The IMF is increasingly bullish.

The economy faces all kinds of problems, from violence to corruption to currency instability and more. But with energy prices holding up, it's hard to look at current valuations and not be intrigued. NGE trades at a P/E ratio of 9 and pays a 4.5 percent dividend, in a country that has a GDP projected to grow by 7.4 percent next year.

Tread carefully if you tread here at all. The ETF has gone nowhere since it launched, trailing emerging markets and broad-based frontier markets, as the chart below shows. But still, it's worth a look.

For the definitive ETF Analytics Report on NGE, click here.

NGE

Chart courtesy of StockCharts.com

 

Forgotten ETF #1: Cambria Global Value ETF (GVAL
AUM: $8 million
ER: 0.69 percent

With $8 million in assets, Cambria Global Value ETF is truly forgotten. It shouldn't be. It's a super-smart ETF that makes being a contrarian investor incredibly easy.

The premise of GVAL is simple. The fund looks at 45 different countries each quarter and buys the 11 cheapest. That means its portfolio is full of countries that are either the walking dead or actively imploding before our eyes. We're talking Brazil, Russia, Spain, Italy, Austria and so on. It's a horror show.

Which is why I love it. The thing about contrarian investing is that it's hard to do. Take Russia. Russia is incredibly cheap right now, with the MSCI Russia Index trading at a P/E of 4.7. But if you think about investing in Russia too long, it becomes impossible to pull the trigger.

Are you really going to invest in a country run by Vladimir "the shirtless wonder" Putin, which is bent on invading Ukraine, facing massive sanctions and has a massively under-diversified economy?

Are you going to buy Brazil, with inflation running rampant, crime on the rise and World Cup preparations running behind?

It's impossible. It's too easy to talk yourself out of the trade.

Which is where GVAL comes in. With GVAL, you no longer have to think about Putin or corruption or sanctions. You can just buy one ETF with the innocuous-sounding name of "Global Value" and get your contrarian bent for free. History shows that buying when there's blood in the streets works. This ETF makes it easy.

For the definitive ETF Analytics Report on GVAL, click here.
 

 

Note: There are plenty of other good, small, under-loved ETFs out there. I'll revisit another 5 under-loved ETFs next month. If you have ideas for my consideration, email me at [email protected].

 


At the time this article was written, the author held no positions in the securities mentioned.


 

 

Matt Hougan is CEO of Inside ETFs, a division of Informa PLC. He spearheads the world's largest ETF conferences and webinars. Hougan is a three-time member of the Barron's ETF Roundtable and co-author of the CFA Institute’s monograph, "A Comprehensive Guide to Exchange-Trade Funds."