Tag Archives: economy

DLN: A Perfectly Adequate Dividend ETF

Summary DLN offers a dividend yield of 2.74%. It’s acceptable, but nothing to write home about. The top several holdings are a mix of established dividend champions, except for the allocation to Apple which is really hanging on the company paying out their cash. The ETF has a moderate expense ratio, but there are so many options I’ve seen lately with ratios that are excellent. I’d really prefer to see consumer staples as an overweight allocation or a higher allocation to utilities. The WisdomTree Largecap Dividend ETF (NYSEARCA: DLN ) looks quite adequate. Ironically, there seems to be no better way to sum up the fund in a single sentence. Expenses The expense ratio is a .28%. When it comes to investing, who wants to throw away their capital on high expenses ratios or trading costs? This is fairly middle of the road for expense ratios in my estimation, but there have been quite a few funds coming up lately with expense rates that are downright excellent. Dividend Yield The dividend yield is currently running 2.74%. That isn’t too bad if the universe of comparable securities is all ETFs, but as far as dividend ETFs go this is running a bit low. Based on current valuations throughout the industry I would expect to see dividend ETFs running closer to 2.9% with some high yield dividend ETFs exceeding 3.5%. Holdings I put grabbed the following chart to demonstrate the weight of the top 10 holdings: (click to enlarge) Apple (NASDAQ: AAPL ) being the top holding makes sense for an ETF that wants to more closely track the market since Apple is such a large part of the market. They certainly have the cash to pay out great dividends but a yield below 2% doesn’t seem like a great fit for the top holding in a dividend ETF. I love seeing Exxon Mobil (NYSE: XOM ) as a top holding. Investors may be concerned about cheap gas being here to stay, but I think money in politics will be around decades (centuries?) longer than cheap gas. Bet against big oil at your own peril. I can say the same about liking Chevron (NYSE: CVX ) as a top holding. These companies offer investors a good way to benefit from high as prices which would generally be a drag on the rest of the economy and on their personal expenditures. Seeing AT&T (NYSE: T ) and Verizon (NYSE: VZ ) with heavy weights is one area where I tend to feel conflicted. The dividend yields are great but the sector is becoming more competitive. On the upside any technology that actually makes them obsolete or at least incapable of growing earnings would be indicative of the investor having a lower cell phone bill, so there is another benefit to aligning the portfolio to match an investor’s individual expenditures. Honestly, is there any better way to pay your phone bill than with a dividend check from the phone company? This is a difficult one to come down on because I love the strategy of covering a cost with dividend income from the company, but I’m also concerned that Sprint (NYSE: S ) is offering a very viable competitive product. Their reception may be terrible in some cities, but they are great in Colorado Springs. Johnson & Johnson (NYSE: JNJ ) is another great dividend company to hold. They have an effective R&D team and a global market presence. Sectors (click to enlarge) The sector composition is fairly balanced. On one hand, a balanced portfolio seems positive. However, I think it comes down to the individual investor. I have more risk tolerance than many investors because I have a fairly long time to recover from negative events, but my portfolio is also missing traditional bond exposure so I tend to prefer the less risky equity allocations. That puts me in a position to favor consumer staples, equity REITs, energy (only in the context of large companies like XOM), and utilities. Occasionally equity REITs are included in the “financials” category, but I’d rather get my REIT exposure through a separate ETF because I want to shove all my REITs into tax advantaged accounts. Therefore, I tend to use large equity REIT allocations in those accounts and would prefer a dividend champion ETF to be underweight on equity REITs. When “financials” simply means banks, then I prefer to see the allocation limited to around 10 to 15% of the portfolio. This allocation is reasonable as a balanced portfolio, but I would really rather see information technology swapping place with utilities and wouldn’t mind seeing financials trade place with either health care or energy. I think those areas offer investors a safer income stream as it relates to the expenses they will face in their life. What to Add Clearly my first area to increase the allocations would be utilities or consumer staples. The utilities offer investors a solid dividend yield while being moderately correlated with interest rates which allows them to serve a purpose that is somewhat similar to bonds in the portfolio while still having the dividend income grow over time. The consumer staples allocation is already almost 15%, but I’d rather see it running closer to 20%. For my risk tolerance, I wouldn’t mind seeing it be even more overweight. Conclusion This is a fairly interesting fund in that it doesn’t stand out from the crowd, but it also doesn’t make have any glaring problems. Overall, I’d have to say that it is perfectly adequate but nothing that really gets me excited. This seems to be a dividend growth fund that just tries to remain reasonable. That makes it an acceptable investment for many investors but it doesn’t stand out as being anything great for my desired allocations.

PDP: Gutsy Momentum Investing For People Braver Than Me

Summary This ETF has a high expense ratio but they are running an aggressive momentum strategy that requires higher costs. The sector allocation combined with a momentum strategy would be enough to put me on edge when I wanted to sleep. If an investor wants to follow momentum investing, this seems like a fine choice. For that investor, I would suggest grabbing some utilities to get a better balance. Investors should be seeking to improve their risk adjusted returns. I’m a big fan of using ETFs to achieve the risk adjusted returns relative to the portfolios that a normal investor can generate for themselves after trading costs. One of the funds that I’m researching is the PowerShares DWA Momentum Portfolio ETF (NYSEARCA: PDP ). I’ll be performing a substantial portion of my analysis along the lines of modern portfolio theory, so my goal is to find ways to minimize costs while achieving diversification to reduce my risk level. Expense Ratio The expense ratio is .63%. I tend to be very frugal with my expense ratios, so I’m less than thrilled with the expense ratio. Of course, portfolios that require more active involvement from managers are going to generally have higher ratios. The question becomes whether the managers will be able to regularly deliver enough performance to justify that higher ratio. Largest Holdings The following chart shows the largest holdings for the fund: The allocations here are fairly interesting, but you expect that momentum portfolios are going to end up having a very strange allocation. It’ll be interesting to see how the various momentum ETFs perform over a sample size of several years during which investors are well aware of the strategy. The presence of ETFs buying stocks based on the stock price having already appreciated seems like it could end up distorting the performance. If the strategy was highly successful, then I would expect whichever ETFs designed their systems to move first to be the winners in the game since their purchases would further drive up prices and encourage other ETFs to buy into the same funds. All around momentum investing is strange beast to me. I’m just a fundamental analysts at heart with a focus on finding the intrinsic value of a company and figure out which factors will be headwinds or tailwinds. Sectors The following chart breaks down the allocation by sector: The consumer discretionary sector has a fairly massive 31.8% weighting. My first thought here is that I would be scared to hold this ETF if this prolonged bull market turned into a bear market. I’m not convinced that we will see that kind of huge drop off in the economy in the next few years because low interest rates can do a great deal to keep market prices high, but I don’t think I have the risk tolerance for this sector allocation. Utilities That utility allocation is credibly low. For an investor opting to use momentum investing and an ETF like PDP for a major position in their portfolio, I would suggest looking to a low fee utility index to add some diversification to the portfolio as a whole. That is, of course, unless you prefer having more volatility in your portfolio. I know some investors are going to be thinking: “Utilities are sensitive to interest rate movements so I don’t want to hold them when interest rates are clearly moving higher.” There is certainly a correlation there. The utilities may suffer if rates increase, but I think they’ll stay low much longer than some investors believe. The macroeconomic environment just doesn’t provide the situation necessary for a sustained increase in rates. I’ve been positioning my portfolio to hold plenty of instruments that are sensitive to interest rates because I really don’t see any high probability paths for interest rates to move higher. An Interesting Option It would be interesting to see a momentum investing strategy that placed caps on sector weightings so that the portfolio wouldn’t end up this heavy on one sector. I have nothing against the consumer discretionary sector; I just prefer the consumer staples for my portfolio. I feel the sector is substantially stronger at resisting a sell off when the market is crashing. All sectors would be likely to fall, but I would expect fewer losses in consumer staples. Conclusion For investors that are interested in momentum investing, this is one option to get that technique into your portfolio. In my opinion the risk of using this strategy is compounded by the aggressive consumer discretionary allocation. In a prolonged bull market this fund should be a solid choice. I’m not predicting a bear market in the near future, but I’m also not willing to make a play that is this aggressive. I just don’t think I’d sleep as well with such an aggressive allocation. If investors opt to use this ETF, I’d suggest checking at least monthly on the sector allocations so the investor can modify their portfolio weights as desired. If investors don’t adjust their portfolio in response they may find themselves going massively overweight on individual sectors.