Journal of Financial Planning: March 2016
Matt Hougan is CEO of Inside ETFs, where he leads a global team dedicated to creating the world’s leading ETF-focused conferences, webinars, and educational content.
2015 was a record year for the ETF industry. Investors put more than $243 billion in net new money to work in ETFs, pushing assets to an all-time high. A record 23 new ETF issuers came to market with their first fund, and 285 new ETFs were launched—more than one for every business day of the year.
To save you from reviewing 285 funds, here are four of my favorite new launches from 2015.
SPDR DoubleLine Total Return Tactical ETF. The most popular new ETF of 2015 was the SPDR DoubleLine Total Return Tactical ETF (TOTL), ending the year with $1.8 billion in assets. It’s run by DoubleLine CEO Jeffrey Gundlach, whom Barron’s calls the “king of bonds” for his track record of beating the market. TOTL is his first ETF.
The fund charges a reasonable 0.55 percent in expenses and is designed to be a core holding in a bond portfolio. Because it’s an ETF, it is fully transparent, so you can see what Gundlach is over- and under-weighting at any given moment. Last I looked, the fund was heavily overweight in mortgage-backed securities, representing almost 60 percent of the portfolio as of January 21, compared to just 29 percent of its benchmark index.
With the outlook for the fixed-income market uncertain, you could do worse than outsourcing your portfolio management decisions to perhaps the greatest bond manager of our generation.
iShares Exponential Technologies ETF. The iShares Exponential Technologies ETF (XT) was launched in partnership with Ric Edelman of Edelman Financial Services. The fund fixes some of the key flaws of traditional technology ETFs; it’s equal-weighted, which solves for the gross concentration problem in most technology ETFs, and it delivers what investors really want: exposure to the companies and products that are changing how we live through technology. Netflix, for example, leverages internet technology to transform how we consume content. But it isn’t included in most technology ETFs because it’s technically a “media” company. XT looks past official sector designations and adds NFLX to the portfolio.
FlexShares Credit-Scored U.S. Long Corporate Bond ETF. The FlexShares Credit-Scored U.S. Long Corporate Bond ETF (LKOR) hasn’t yet caught on with investors. As of late January it had just $5 million in assets and traded just a few hundred shares a day. But I hope it catches on, because it is a step-wise improvement on traditional bond ETFs.
I have two big problems with most bond ETFs. First, bond indexes were never meant to be owned. Traditional bond indexes assign the highest weight to securities with the most debt outstanding. That is prima facie absurd. Why would you invest the most money in companies or countries with the most debt? Second, bond indexes rely on credit ratings from the three major credit ratings agencies. But those ratings are sub-optimal. LKOR uses a proprietary credit scoring model developed at Northern Trust that estimates how likely it is that a bond issuer will repay its debt and carries an expense ratio of just 0.22 percent per year.
Pacer Trendpilot 750 ETF. I would never buy the Pacer Trendpilot 750 ETF (PTLC). I don’t believe in its underlying strategy. It uses a momentum-following strategy to rotate in and out of the market. Its standard position is to be long U.S. stocks. If the market closes below its 200-day moving average for five consecutive days, the fund shifts 50 percent of its portfolio into T-bills. If, after hitting this signal, the fund continues to fall and closes down five days later, it rotates 100 percent into T-bills.
So why do I think it’s an important fund? Because millions of investors do believe in momentum-driven rotation strategies, and for those investors, PTLC is a boon.
The biggest problem with momentum-driven rotation strategies is that, even when they work, they can be extremely tax-inefficient. But the ETF’s use of the creation/redemption mechanism can reduce and/or eliminate capital gains. As a result, this ETF will deliver the experience investors want but with better tax results.
An additional 1,000-plus ETFs are already in registration at the SEC, and hundreds more are being developed in the labs of ETF entrepreneurs everywhere. Some products will be fad-driven nonsense, but dozens and dozens could be great additions to your client portfolios.