Wednesday, March 31st, 2010
ETFs have received a lot of attention in recent years particularly given the irrational market environment we’ve come through and the impact that has had on the results of active money managers.
For example, over the past few years studies have shown that only a small number of actively managed funds beat their respective indexes which has proliferated the interest in ETFs, most of which use a passive index-tracking strategy. According to Investment Executive, over the past five years ETFs have grown at an annual rate of close to 30% versus about 6% for mutual funds.
ETFs are legitimate products and they can play a fantastic role in investor portfolios. But the way ETFs are understood by many investors seems to be based on a few faulty assumptions.
Common Assumptions About ETFs
- All investors should focus on how their investments are performing relative to an index. But if you use an investment strategy you’re comfortable with and generate a good level of return with a reasonable level of risk (and ultimately reach your investment goals by doing so), then perhaps the return of an index is not so important.
- Everyone is a do-it-yourself investor. ETF fees don’t include the cost of the professional advice and guidance that most investors need to navigate the financial world as they go through the different stages of life.
- All ETFs share qualities like low fees. In reality, though, ETFs can differ dramatically in cost. And often, there are additional costs to consider, among them brokerage commissions since ETFs are bought and sold on the stock market, through stockbrokers.
The needs of most long-term investors reading this site can be well served through a diverse group of high quality dividend growth stocks. However, some folks are passionate about ETFs, and those folks can benefit from some clarification.
ETFs can be great tools when they are understood and used correctly in a portfolio. In fact, there are some fantastic dividend ETFs that can provide investors with smaller portfolios a good diversification while they are raising funds to purchase individual stocks. Dividend ETFs specific to different countries or markets can be a great way to get exposure to markets in which you are not yet comfortable purchasing individual stocks. Those searching for yield may look to high yield ETFs to diversify risk while still maintaining an above average yield within their portfolio.
Even using them as points of research to see which stocks they are holding makes Dividend ETFs, in and of themselves, worth something.
Posted in Investor Education | 2 Comments »
Sunday, June 1st, 2008
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I am a huge proponent of buying the best dividend paying stocks when they are value priced. However, if you aren’t sure about picking an individual stock and you still want to reap the rewards of Dividends, check out this list of some different Dividend Exchange Traded Funds (ETF’s).
The Vanguard Dividend Appreciation Fund (AMEX: VIG) is a one of the cheapest dividend ETFs, with an expense ratio of 0.26%. Some rivals charge as much as 0.60%. But fees aren’t everything here. VIG’s current yield — slightly less than 1.77% — is on the low side, as is its total return of roughly 7% since its inception in late April 2006.
VIG is benchmarked to the Mergent Dividend Achievers Select Index, a subset of the Mergent Dividend Achievers Index — a market-cap-weighted index of stocks with a consistent history of increasing dividends. Its holdings are highly concentrated in three sectors: consumer staples at 23%, financials at 20%, and industrials at 17% of assets. The top five stock holdings include Johnson & Johnson, GE, ExxonMobil, AIG, and IBM, each representing roughly 4% of assets.
Among other ETFs focusing on high-yielding equities, the iShares Dow Jones Select Dividend (NYSE: DVY), the first dividend ETF, has gathered more than $7 billion in assets. It invests in 100 of the highest dividend-yielding securities (excluding real estate investment trusts) in the Dow Jones U.S. Total Market Index.
First Trust Morningstar Dividend Leaders (AMEX: FDL) invests in the top 100 stocks of the Morningstar Dividend Leaders Index. These are the index’s highest-yielding stocks, ranked by the consistency with which they pay dividends and the ability to sustain those dividends going forward. Three securities — Citigroup, Bank of America, and Altria — together make up more than one-fourth of the fund.
State Street SPDR Dividend (AMEX: SDY) invests in the 50 highest dividend-yielding S&P Composite 1500 constituents. This index tracks equities that have consistently increased dividends every year for at least 25 years. Investing in these long-term dividend-paying stocks reduces the risk that the fund’s holdings will cut their dividends.
For Dividend Daredevils
More adventurous investors might consider the Claymore/Zacks Yield Hog ETF (AMEX: CVY), which aims to double the yield of other dividend-paying ETFs. The fund invests in high-yield securities such as preferred shares, master limited partnerships, closed-end funds, American Depository Receipts, and Real Estate Investment Trusts. It’s a riskier play, since the holdings don’t all have a long history of regular, stable dividends.
Paying the piper
Tax law changes in 2003 lowered the tax on most dividends to 15%, making dividend-paying stocks more appealing. This law is set to expire at the end of 2008, and if it does, dividend-paying stocks may become less desirable.
Courtesy of Motley Fool
Posted in Investor Education, Stock Studies | 2 Comments »
Friday, May 30th, 2008
As the Baby Boomer generation plans for their retirement, it is no secret that there will be an increasing demand for income producing securities. While I prefer individual dividend growth stocks, the ETF universe is offering some attractive alternatives that may make retirement planning a little less time-intensive.
With number of income producing investment products increasing, one should notice the growing selection of Dividend paying ETF products that sample indicies from around the globe. With low expenses and exposure to hundreds of companies worldwide, ETF’s may become the choice investment for the future.
How To Choose Exchange Traded Funds
When selecting income producing ETF’s and allocating assets to these various funds, planning for income in retirement and managing portfolio risk becomes a bit easier! Take this sample portfolio for instance:
iShares MSCI Pacific Ex. Japan (EPP) 20%
The fund uses a representative sampling strategy to try to track the MSCI Pacific ex-Japan index. The index consists of stocks from the following four countries: Australia, Hong Kong, New Zealand and Singapore. This investment is non-diversified.
This ETF is down over 12.0% so far this year and now sports a juicy Dividend Yield of 5.25%, while holding the expense ratio at 0.50%. This may present an excellent buying opportunity for a long-term investor.
BLDRS Developed Markets 100 (ADRD) 30%
For exposure to Japan, The United Kingdom, France and Germany, ADRD does the trick just fine as it seeks to provide investment results that correspond, before fees and expenses, to the price and yield performance of the Bank of New York Developed Markets 100 ADR Index.
ADRD provides a Dividend Yield of 2.88% and has an extremely low P/E ratio of just 9.36. The expense ratio for ADRD is reasonable at 0.3% with a standard deviation of 9.69.
iShares Dow Jones Select Dividend (DVY) 35%
The fund uses a representative sampling strategy to track the Dow Jones Select Dividend index. The index is comprised of one hundred of the highest dividend-yielding securities (excluding REITs) in the Dow Jones U.S. Total Market index, a broad-based index representative of the total market for U.S. equity securities.
This Dividend ETF Yields a respectable 4.5%, making it well worth the tiny expense ratio of 0.40%. DVY also sports a relatively low standard deviation of 6.64, allowing you to sleep at night during your retirement!
Vanguard REIT Index (VNQ) 15%
The Vanguard REIT ETF seeks income and moderate long-term capital growth. The fund normally invests at least 98% of assets in stocks of real estate investment trusts (REITs) that are included in the Morgan Stanley REIT index.
Real Estate Investment Trusts have long been used in retirement portfolios for their income producing nature and this ETF is no exception. VNQ delivers a 5.1% Yield and has a return of 2.29% YTD. As usual, Vanguard keep their expenses to the bare minimum at 0.12%.
The Story Behind The Story
This portfolio is not necessarily built for tax efficiency, but the use of Exchange Traded Funds and the emphasis on dividend income is taylor made for retirement planning. This portfolio covers a host of asset classes as well as having a great geographic asset mix. I am a huge believer in investing outside of North America in order to capitalize on both capital growth and higher dividend yields offered in other markets.
Why Not Bonds?
I am not, however, a huge believer in fixed income going forward as the supply of money should be greater than the demand. Baby boomers will not be requiring loans, but will be investing their hard-earned savings.
This coupled with pension fund managers seeing a 6.0% fixed income return as attractive will likely hold bond returns lower moving forward. Money will be cheap for those of us looking to borrow.
That said, a portion of a portfolio dedicated to fixed income in retirement will certainly reduce risk. However, with longer life spans, it is absolutely necessary to have capital growth in a retirement portfolio…we could live a lot longer than we think!
I certainly don’t want to run out of money, or places to spend it when I reach 114 years old. But, I guess I’ll cross that bridge when I come to it …hopefully walking on my own two feet.
Posted in Investment News | 12 Comments »
