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My Favorite Low Fee ETFs And Mutual Funds For Domestic Equity

Summary Investors should be comparing several options when picking the ETFs or mutual funds they want to use. I’ve collected several of the ETFs that I think are very strong contenders for best of breed status. These ETFs tend to have low expense ratios and offer very diversified domestic exposure. I’m concerned that the market prices are relatively high. While I expect long term prices to go up, I want to protect against short term weakness. Because I’m concerned about weakness in the market, I see SCHD as a top contender among equity non-REIT investments in the domestic market. One of the areas I frequently cover is ETFs. I’ve been a large proponent of investors holding the core of their portfolio in high quality ETFs with very low expense ratios. The same argument can be made for passive mutual funds with very low expense ratios, though there are fewer of those. In this argument I’m doing a quick comparison of several of the ETFs I have covered and explaining what I like and don’t like about each in the current environment. By covering several of these ETFs in the same article I hope to provide some clarity on the relative attractiveness of the ETFs. One reason investors may struggle to reconcile positions is that investments must be compared on a relative basis and the market is constantly changing which will increase and decrease the relative attractiveness. For investors that want to see precisely which assets I’m holding, I opened my portfolio about a week ago. The ETFs (and two mutual funds) I want to cover are indicated below. ETFs and mutual funds for consideration Vanguard Total Stock Market ETF (NYSEARCA: VTI ) Fidelity Spartan® Total Market Index Fund (MUTF: FSTVX ) –I am long every investment above this line– Schwab U.S. Broad Market ETF (NYSEARCA: SCHB ) iShares Russell 3000 ETF (NYSEARCA: IWV ) Schwab U.S. Dividend Equity ETF (NYSEARCA: SCHD ) Vanguard Dividend Appreciation ETF (NYSEARCA: VIG ) When I’m contemplating investing in an ETF, I don’t want to buy a short term holding. At heart, I am a buy and hold investor that is willing to sell most investments only when I become sufficiently bearish. I generally handle rebalancing slowly through allocating new investments to the asset class that needs more strength. However, I don’t rebalance to exact ratios. I follow general rules for the allocation but within reasonable boundaries I will overweight or underweight sectors based on their relative attractiveness. When the market appears overvalued across the board, I reduce my rate of purchase. I still dollar cost into major indexes and I still will allocate some new funds, however I’m also more willing to spend money on doing major projects around the house rather than adding to my investment portfolio. I don’t cut off purchases entirely because I believe the markets will trend to move upwards over time by at least the rate of inflation, which will be much higher than my savings account will pay. Currently I consider the market to be slightly overvalued. Not as overvalued as it was before Greece (which I consider overblown), but the high P/E ratios make domestic investment riskier and the high correlations of international markets combined with the problems in Greece and the problems I expect in China make me concerned about short term international performance. Total and Broad Market VTI and SCHB are total and broad market ETFs. They have a correlation running 99% or higher on returns, so I consider them to be interchangeable. The same can be said for FSTVX though it is a mutual fund. I use mutual funds for an employer sponsored retirement account that is limited to investment in certain mutual funds. I consider these investments to be the best of breed for investors seeking exposure to the total or broad U.S. equity market. Despite my very high opinion of these investments, I feel the market is pushing on being valued too highly and see potential for problems with increases in interest rates expected in September. I’m expecting to see an increase in inflation over the next year or so with higher velocity of money and an increase in inflation may reinforce the decision to slightly increase rates. IWV holds very similar investments and also has very high correlation to the other ETFs listed here, but I expect it to outperform the other options over the long term because of a higher expense ratio. When the assets are very similar, I expect the expense ratios to be a significant factor in the relative performance. Dividend Focused (non-REITs) One of my favorite dividend investments is the Schwab U.S. Dividend Equity ETF. I expect it is one area where I’ll be adding some cash over the rest of the year. SCHD offers an extremely low expense ratio and free trading in Schwab accounts make it an ideal way for an investor to add incremental small levels of exposure. Large cap companies with solid dividends have shown some relative strength in corrections historically and I see the potential for that trend to continue. Aside from funds going into FSTVX for dollar cost averaging, SCHD is easily the strongest contender for receiving additional investments. I’m not long SCHD yet, but I expect to be long on it later this year. Lately SCHD has been weaker than the broad market ETFs, but I think the difference in performance reflects a bullish view by the market. Another solid option for investors wanting diversification in their dividend growth investments is VIG. In my personal rankings VIG has to come below SCHD due to a meaningfully higher expense ratio and a lack of free trading in my accounts. For investors using accounts that have free trading on VIG, it would make more sense for small incremental additions to the portfolio to use VIG rather than SCHD. Conclusion I believe I have selected several best of breed ETFs for investment in the domestic equity market, but I’m becoming less bullish due to high P/E ratios, historically high earnings relative to GDP (raising the denominator in the P/E ratio), and the potential for higher interest rates combined with inflation. While equities do serve as a decent hedge against low rates of inflation, I would be compelled to buy inflation adjusted bonds if they had decent yields. I believe there are plenty of other investors that would also like to be holding more bonds for risk reduction and if decent yields become available I expect it will weigh on stock prices as investors adjust allocations. Some investors may feel that such a situation would hurt dividend stocks and thus dividend ETFs more than other sectors. I’ll take the risks there because a little weakness from raising rates is acceptable to me in exchange for having investments that may not fall as hard if the situation with China and Greece starts hitting the U.S. equity market harder. Disclosure: I am/we are long VTI, FSTVX. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis.

SCHD: A Natural Core Holding For Dividend Growth Investors

Summary SCHD offers a great portfolio for dividend investors to build around. During previous recessions (and corrections) the dividend paying companies of the S&P 500 held up better than those without dividends. With the high P/E ratios climbing over the last few years we have seen the market become more dangerous. Dividend stocks underperformed the last few years as the market became more bullish (expensive). A more bullish market makes me prefer SCHD over SPY. The holdings offer some great stocks and exposures that create natural hedges to the macroeconomic challenges. Dividend growth stocks offer investors a solid combination of current income and growth, but some investors still don’t understand their power. One of my favorite ETFs for this sector is the Schwab U.S. Dividend Equity ETF (NYSEARCA: SCHD ). Some investors will point out that they can pick and choose which individual dividend stocks offer the most compelling investments and there is nothing wrong with that plan. If an investor feels comfortable picking out individual stocks, they are welcome to do so. However, every investor needs to remember to stay diversified and that is where a low fee dividend ETF comes in. The Schwab U.S. Dividend Equity ETF has an expense ratio of only .07, is free for trading in Schwab accounts, and offers investors a yield of 2.88%. That isn’t a great yield, but it isn’t bad when considering how many companies the ETF needs to provide solid diversification. In this area I favor enhanced indexing. SCHD doesn’t need to be the only dividend investment in the portfolio, but it provides a solid piece to build around. Dividend Growth Performance Investors looking at returns over the last few years may feel like SCHD is failing to keep up with the market, but that is a natural consequence of the market getting bullish on stocks that don’t pay dividends. I prefer stocks with solid dividends. While investors should consider total return, I see no reason to move away from dividend stocks. Instead, I see the recent underperformance as making them more attractive. Since early November 2011, right after SCHD was formed, it has delivered returns of 64.6% compared to the SPDR S&P 500 Trust ETF ( SPY) delivering 79.13%. That weakness for SCHD has been a reflection of the large dividend stocks underperforming the index as shown in the chart below. (click to enlarge) Dividend stocks are out of favor and appeared to be going out of favor since 2012. As the P/E ratios climb to dangerously high levels, I would rather invest in the companies that are paying out dividends and delivering a meaningful portion of their earnings. I would rather invest in industries with strong dividend payouts. During the weakest markets, these stocks have held up better. If this market overheats, then SCHD looks like a great option to survive the weakness. If investors want to avoid losing by selling out at the bottom of a market, they would be wise to hold an investment where they can focus on the dividends rather than the panic. Holdings The following chart shows the top holdings of the Schwab U.S. Dividend Equity ETF ranked by their values. (click to enlarge) What dividend growth investor doesn’t like these companies? In my opinion, this is precisely the kind of diversification a dividend investor should be seeking. Who doesn’t like Procter and Gamble (NYSE: PG )? Some analysts can get bearish on it or argue that it is over-valued, but the point of the diversification is to protect investors from overpaying for a few companies. Verizon Communications Inc. (NYSE: VZ ) is one of the high yielding stocks (4.66%) that concern me because the telecommunications industry looks far less attractive when Sprint (NYSE: S ) is waging a price war that could severely damage earnings throughout the industry. I love the yield, but I have tried holding companies that in highly competitive industries marked by excessive growth of capacity and battles to deliver the lowest price. That was the investment where I had my worst losses and it taught me to be very wary of price based competition with excessive building of capacity. Exxon Mobile Corp. (NYSE: XOM ) is a great play on the oil industry and either it or another major oil company belongs in every dividend growth investor’s portfolio. The beauty of oil is that crashing prices on oil mean more income for middle class and lower class consumers. Cheap oil means lower costs for transporting materials. Cheap oil is good for most of the portfolio. On the other hand, expensive oil is a headwind for many major companies and a tailwind for the big oil players like XOM. This should be a natural holding for dividend growth investors. Conclusion SCHD is a solid way for investors to get a core holding for their dividend growth portfolio. It offers an excellent selection of major dividend growth champions which allows investors to build their portfolio around those champions by overweighting the companies that best align with their risk tolerance and goals. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis.

SDOG Looks Great For Retirees Seeking Dividend Yields With Stability

Summary I’m taking a look at SDOG as a candidate for inclusion in my ETF portfolio. The expense ratio is a bit high, but the total returns have been similar to SPY. The dividend yield (3.20%) makes this ETF particularly attractive to retiring investors that want stronger yields. I’m putting SDOG in my list of potential ETFs to use for building my portfolio. I’m not assessing any tax impacts. Investors should check their own situation for tax exposure. 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. I’m working on building a new portfolio and I’m going to be analyzing several of the ETFs that I am considering for my personal portfolio. One of the funds that I’m considering is the ALPS Sector Dividend Dogs ETF (NYSEARCA: SDOG ). 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. What does SDOG do? SDOG attempts to track the total return (before fees and expenses) of the S-Network Sector Dividend Dogs Index. At least 90% of the assets are invested in funds included in this index. SDOG falls under the category of “Large Value”. Does SDOG provide diversification benefits to a portfolio? Each investor may hold a different portfolio, but I use (NYSEARCA: SPY ) as the basis for my analysis. I believe SPY, or another large cap U.S. fund with similar properties, represents the reasonable first step for many investors designing an ETF portfolio. Therefore, I start my diversification analysis by seeing how it works with SPY. I start with an ANOVA table: (click to enlarge) The correlation is about 93% according to the regression. That is low enough that it appears to offer some diversification benefits. Extremely low levels of correlation are wonderful for establishing a more stable portfolio. I consider anything under 50% to be extremely low. However, for equity securities an extremely low correlation is frequently only found when there are substantial issues with trading volumes that may distort the statistics. Standard deviation of daily returns (dividend adjusted, measured since January 2013) The standard deviation is great. For SDOG it is .6611%. For SPY, it is 0.6851% for the same period. SPY usually beats other ETFs in this regard, so a lower volatility level is very impressive. Because the ETF has fairly low correlation for equity investments and a low standard deviation of returns, it should do fairly well under modern portfolio theory. Liquidity looks fine Average trading volume is high enough for me, a bit over 140,000. Mixing it with SPY I also run comparisons on the standard deviation of daily returns for the portfolio assuming that the portfolio is combined with the S&P 500. For research, I assume daily rebalancing because it dramatically simplifies the math. With a 50/50 weighting in a portfolio holding only SPY and SDOG, the standard deviation of daily returns across the entire portfolio is 0.6608%. With 80% in SPY and 20% in SDOG, the standard deviation of the portfolio would have been .6726%. If an investor wanted to use SDOG as a supplement to their portfolio, the standard deviation across the portfolio with 95% in SPY and 5% in SDOG would have been .6816%. Why I use standard deviation of daily returns I don’t believe historical returns have predictive power for future returns, but I do believe historical values for standard deviations of returns relative to other ETFs have some predictive power on future risks and correlations. Yield & Taxes The distribution yield is 3.20%. That appears to be a respectable yield. I’m quite happy with the yield and the strong yield makes this fund worth considering for retiring investors that plan to live off the yield. I prefer a strong dividend yield to “creating your own dividends” by selling shares because one of the reasons for ETF investing is that it removes the human emotions. There is less temptation to freak out and sell when the market is down if the investor is simply living from the dividends and doesn’t need to check in on the portfolio. I’m not a CPA or CFP, so I’m not assessing any tax impacts. Expense Ratio The ETF is posting .40% for an expense ratio (net and gross). I want diversification, I want stability, and I don’t want to pay for them. The expense ratio on this fund is higher than I want to pay for equity securities, but not high enough to make me eliminate it from consideration. I view expense ratios as a very important part of the long term return picture because I want to hold the ETF for a time period measured in decades. Market to NAV The ETF is at a .05% premium to NAV currently. Premiums or discounts to NAV can change very quickly so investors should check prior to putting in an order. The ETF is large enough and liquid enough that I would expect the ETF to stay fairly close to NAV. Generally, I don’t trust deviations from NAV and I will have a strong resistance to paying a premium to NAV to enter into a position. Largest Holdings The diversification within the ETF is mediocre. The top 10 are all over 2%, which isn’t terrible but feels pretty weak for an ETF with an expense ratio of .40%. What exactly are investors receiving for that expense ratio? The best argument for accepting the expense ratio, in my opinion, is that the dividend yield may be strong enough to keep people from selling their shares when the market is down. If the strong dividend yield can convince casual investors to avoid human errors, then the expense ratio is a fine price to pay. (click to enlarge) Conclusion I’m currently screening a large volume of ETFs for my own portfolio. The portfolio I’m building is through Schwab, so I’m able to trade SDOG with no commissions. I have a strong preference for researching ETFs that are free to trade in my account, so most of my research will be on ETFs that fall under the “ETF OneSource” program. The best part is clearly the dividend and the worst part is the expense ratio. For someone that is living off the yield and trying to keep their hands off the investment, SDOG is a very viable option. The reasonable level of liquidity is a huge benefit if a life event forces the shareholder to sell, but the strong dividend yield should reduce the temptation to mess with the account. I’m going to keep SDOG in my list of contenders for a spot in the portfolio. I intend to allocate part of the portfolio to an ETF that is similar to SPY but with an emphasis on stronger dividends. SDOG will be competing with other ETFs like (NYSEARCA: SCHD ) for that role. Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis. The analyst holds a diversified portfolio including mutual funds or index funds which may include a small long exposure to the stock.