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Summary PEY offers a dividend yield of 3.39%. The individual company allocations include some relatively heavy concentrations. The sector allocation looks nice, but the volatility on the ETF has been surprising. I like the underlying allocations, but rather than using an ETF that trades the companies I’d prefer a simple “buy and hold” strategy. The PowerShares High Yield Equity Dividend Achievers Portfolio ETF (NYSEARCA: PEY ) has an excellent yield at 3.39% and the sector allocations look great. A heavy allocation to utilities and consumer staples seems like a solid way to build a defensive portfolio, however the volatility of the fund has been surprising. Expenses The expense ratio is a .54%. This is quite a bit too high for my tastes. Holdings I put grabbed the following chart to demonstrate the weight of the top 10 holdings: The heaviest weighting by a slight margin was given to the Vector Group (NYSE: VGR ). The stock has an incredibly high 6.7% dividend yield and is in the cigarette business. While I’m not thrilled with the actions of tobacco companies, the dividend is very strong, and their product benefits from being highly addictive. For the investor addicted to reliable income, this is an industry that simply makes great financial sense. I thought it was interesting that the Vector Group received such a heavy weighting when I didn’t see Altria Group (NYSE: MO ) near the top. Digging deeper into the holdings I found that Altria Group was included and currently represents almost 2% of the portfolio. You may also notice a few oil companies in the portfolio. ConocoPhillips (NYSE: COP ) and Chevron (NYSE: CVX ) both get respectable weights and offer investors exposure to the oil industry which seems to be entirely out of favor. When it comes to oil allocations, I’m fine with having them in the ETF or doing them individually. In the case of ETFs with higher expense ratios, I would lean towards just buying the oil companies individually since I see the sector as a simple “buy and hold” area. Market Cap and Style The style demonstrates a fairly heavy focus on value companies with a willingness to allow blended allocations. It should be noted that they do have a fairly notable allocation to both the small-cap and mid-cap areas which I would expect to increase volatility. Sectors This was the chart that I thought provided the best selling point for PEY. They offer investors a significant allocation to utilities and consumer staples. These heavy allocations should result in a portfolio that is capable of being significantly more defensive and able to withstand downturns in the economy. I wanted to check and see if things had played out that way, so I ran a quick regression on PEY with the S&P 500 going back to December of 2004. It turns out that PEY got hammered pretty hard. The worst drawdown during the recession was saw the S&P 500 fall by about 55%, but PEY managed to lose over 72% of the funds value. I don’t believe that the fund is currently as volatile as those numbers would suggest, but I would prefer to see more diversification in the portfolio allocations since running allocations greater than 3% to anything other than a company like Exxon Mobil (NYSE: XOM ) is simply introducing additional price risk. Conclusion The yield is solid and the sector allocations give the fund a definite appeal for investors looking for that steady source of income. During 2008 and 2009 the fund took some pretty harsh beatings, but I wouldn’t expect them to see that kind of loss again. One of the challenges that I believe the fund faces is having the objective to track the price and yield performance of the Nasdaq US Dividend Achievers® 50 Index. The lack of diversification within the index makes creates a challenge for building any diversification into the fund. The individual holdings include several great dividend growth champions, but I don’t see a benefit in creating higher levels of concentration or trading the positions frequently. The underlying companies are the kind where an investor might serve their family well by simply taking physical delivery of the shares and stuffing them in a safe with the door closed for the next 50 years. There are some areas where more frequent trading makes sense, but when it comes to these dividend champions, I don’t see a need to have any frequent changes. If the fund dropped the expense ratio to .05% and indicated that there would be almost 0 trades over the next few decades, I’d be very bullish on the fund because the underlying companies offer investors a solid growing stream of income. In essence, I like the allocations more than the strategy that created them. Scalper1 News
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