Tag Archives: demographics
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.
IFGL: International REIT Exposure Could Include More Countries
Summary The ETF offers investors a fairly unique risk exposure. The fund has heavier allocations to individual countries than I would prefer. The ETF has more concentration to individual company weights than I would want to see. 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 I am researching is the iShares FTSE EPRA/NAREIT Global Real Estate Ex-U.S. Index ETF (NASDAQ: IFGL ). 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 IFGL sports an expense ratio of .48%. Not impressive, in my opinion. Yield The ETF offers a fairly nice distribution yield 3.66%. While there are some things I don’t like, that is a fairly respectable yield. If investors are going to buy an ETF where the individual holdings are largely unfamiliar to them, then I’d prefer to see the ETF have a strong yield to encourage the shareholders to maintain their positions during periods of volatility. Some investors will focus on wanting to see the value of their portfolio increase with every statement, but I think they should also keep an eye on the amount of income the portfolio is generating. Country Allocations I grabbed the following chart from the iShares website: (click to enlarge) I understand that international equity REIT ETFs have a tendency to overweight Japan. No big deal, we can work around that. On the other hand, they are also going fairly heavy on Hong Kong. The top 4 country weights represent around 65% of the portfolio. I find that a little disappointing since I believe international REIT exposure should be designed to improve diversity in small allocations and lead to a lower risk portfolio rather than believing that investors should use the allocation to pump up returns. Since I like this niche for only small allocations to reduce risk rather than drive returns, a heavy allocation to individual countries is a negative factor for me. What I would like to see is the top allocations reduced and increase in the allocations to other parts of Europe (such as Sweden and Switzerland). I wouldn’t mind seeing some fairly light allocations to more exotic locations either to get a little REIT exposure to the emerging markets. Missing Allocations If you’re trying to build a thoroughly diversified international position for the portfolio, it would be wise to consider including ETFs in Latin America and Africa. I’m not a fan of putting huge weights on emerging markets, but a very small weight is reasonable since the goal is diversification of risk factors. Investors may also notice that this ETF went heavy on Hong Kong rather than including an allocation directly to China. I don’t have a problem with that strategy. The markets are correlated but I’d feel more comfortable with the exposure to Hong Kong. REITs The other thing investors should remember is that this international allocation is investing in REITs. In the domestic market REITs and regular equity markets can diverge quite substantially over years so investors would be wise to consider including allocations to the normal corporate international market. Holdings I built the following chart to represent the top 10 holdings. (click to enlarge) These allocations are a little heavy in my opinion. Just like the allocations to individual countries were heavy, I’d rather see the ETF limiting positions to around 2% to 3% of the portfolio as the cap for a single allocation. The positions should not have a hard cap that would force immediately sales and expose the ETF to losses from rapidly liquidating positions, but a soft cap that encourages them to reallocate capital would be favorable. Conclusion The expense ratio is too high for my liking, but the ETF still offers some diversification benefits as long as the weight is low. I’d really prefer to see the ETF offering a more thorough diversification across both individual holdings and weights for countries. If investors are confident these markets will outperform over the next several years, than there is no problem with the concentrated allocation. If the investors, like me, see international REIT ETFs as a diversification play then it doesn’t make sense to have the positions concentrated.