No, not that Financial Crisis but the one in my portfolio. Over the last quarter my investments in the financial sector stayed put at 10.8%, in spite of not buying any individual financial stocks. I didn't have to look far to find the problem. At the end of June I had the following ETFs and Closed-end Funds in my income portfolio:
Alpine Total Dynamic Dividend Fund - 16.29% Yield - (AOD)
Alpine Total Dynamic Dividend Fund (the Fund) is a diversified, closed-end management investment company. The Fund has an investment objective to invest in equity securities that provide high current dividend income. The Fund also focuses on long-term growth of capital as a secondary investment objective.
% Financial: 19.04%
SPDR S&P Dividend - 5.02% Yield - (SDY)
The Fund seeks to replicate as closely as possible, before expenses, the price and yield of the S&P High Yield Dividend Aristocrats Index. The Fund uses a passive management strategy designed to track the price and yield performance of the Dividend Index.
% Financial: 33.97%
Vanguard Financials ETF - 4.08% Yield - (VFH)
The Fund seeks to track the performance of a benchmark index that measures the investment return of financial stocks; specifically the MSCI U.S. Investable Market Financials Index. This is an index of stocks of large-, mid-, and small-size U.S. companies within the financials sector.
% Financial: 97.93%
Vanguard Dividend Appreciation ETF - 2.02% Yield - (VIG)
The Fund seeks to track the performance of the Dividend Achievers Select Index that measures the investment return of common stocks of companies that have a record of increasing dividends over time.
% Financial: 12.68%
Vanguard REIT ETF - 5.38% Yield - (VNQ)
The Fund seeks to track the investment performance of the Morgan Stanley REIT Index by investing at least 98% of its assets in stocks issued by real estate investment trusts.
% Financial: 0.00%
Vanguard High Dividend Yield - 3.65% Yield - (VYM)
The Fund seeks to track the performance of a benchmark index that measures the investment return of common stocks of companies that are characterized by high dividend yield.
% Financial: 23.83%
As you can see all the ETFs and closed-end funds above, except VNQ, include heavy allocations in the financial sector. Since I am targeting no more than 10% investment in the financial sector, this presents a problem. So what's the solution? Here is what I am going to do:
This exercise demonstrates the importance of knowing your asset allocation, including what is hidden in ETFs and funds. I have decided to take take this portion of my income portfolio in a different direction. Thursday, we'll look at its new focus and where it fits in my overall asset allocation.
(Photo: sanja gjenero)
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The thing that really puts me off of SDY is that they weigh components based off dividend yield. In other words stocks that could get temporarily high dividends like BAC for example will have a higher weight than say JNJ, which is somewhat risky imho. I am a big fan of equal weight investing anyways though.
Another thing that I don't like about certain dividend etf's is that you have almost no control as to what they own. My take is that if you wanted to track the high yielding aristocrats, you'd purchase them all and reinvest the dividends. You'd be selling only when a dividend is cut, right? Not, the SDY sells the dividend cutters at the end of the year, as the dividend index is rebalanced.
Do you think that financials are setting up for a rebound. The sector seems oversold. Also, if problems continue the Fed may have to step in and provide more support. I like playing the financials through ETFs because of the diversification they offer. Who knows which bank stock will be the next to report bad news but the industry as a whole seems to be setting up for a rebound. I'm just not sure when.
Look at more closed end funds. Most are selling at 15% discounts to NAV as 7/15/2008.
AOD is selling at 7% discount now, and 6 months ago it was selling at a 7% premium.
Dividend Growth Investor: I agree dividend yield is sorry way to weight a fund. My individual picks consistently out-perform my income ETFs. I am going to take this portion of my portfolio in a different direction. More on Thursday.
Deep Value Dividend Investor: I do think the financials are oversold and will rebound. However, they may go down before going up.
erik: You are correct. It shows that the "efficient markets" aren't always efficient.
Best Wishes,
D4L
I agree to your comment erik.
Interesting article.
Maybe I will link to this.
Thanx for posting.