Three ETFs to Match Together
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Exchange-traded funds, like mutual funds, can be match together to create a strategy that adds more diversification to the investment portfolio. One important consideration to doing this successfully is to pair non-correlated ETFs.
A proven strategy that has worked with some mutual funds is to take one third of the investment capital and allocate it to an equity income fund. The next third goes to an intermediate bond fund. The last third goes to an international equity stock. The results are that one third of the portfolio performance is based on both dividends and capital appreciation, one third is based on interest income, and one third is based on dividends and capital appreciation from international equities, which will behave differently than US equities. Here are three ETFs chosen to meet this idea.
The SPDR S&P Dividend ETF (NYSEMKT: SDY) seeks to mimic the S&P High Yield Dividend Aristocrats Index. This index is made up of stocks that followed a policy of dividend increases for the past 25 years. The start date was Nov of 2005 and the performance history for various periods is positive. SDY has 81 holdings and the top spot goes to Avon Products, with a 2.79% allocation. SDY has delivered investment returns in long-term capital appreciation and dividends. The operating expense ratio is 0.35%. SDY is a solid contributor to the strategy described above. More information can be found here.
The SPDR Barclays Capital Intermediate Term Corporate Bond ETF (NYSEMKT: ITR) follows the Barclays Capital Intermediate US Corporate Index. ITR was brought to the market on Feb of 2009 and the track record that is forming appears attractive, in light of a falling interest rate environment. The main source of returns for the strategy is the monthly dividends that are paid from the interest that is collected. Portfolio changes are dictated by the index. This leads to the opinion that bonds come out of ITR when matured or dropped from the index. Changes in bond values will be a direct result of interest rate changes. More information on ITR is available on here.
The iShares MSCI EAFE Index Fund (NYSEMKT: EFA) follows the MSCI EAFE Index. EAFE means Europe, Australian and Far Eastern. The inception date was Aug of 2001 and the returns history for various periods shows volatility. EFA does pay a healthy dividend semi-annually. The portfolio is made up of 924 stocks and Nestle-SA-REG, an ADR, with a 2.07% allocation of the fund. Details on EFA are found on here.
This set of ETFs is loosely modeled after The American Funds Triad Strategy. This is a balanced approach where investment capital is committed to three mutual funds, each receiving one third. No rebalancing is done between the funds. The funds used are The Investment Company of America, The New Perspective Fund, and The Bond Fund of America. These funds are available in other share classes. The mix of types of investments is as follows:
U. S Stocks 40%
Non- U.S. Stocks 22%
U. S. Bonds 27%
Non- U. S. Bonds 5%
Cash and equivalents 6%
The results of this mix are evident in the short returns table. Non-correlation is the driver that reduces overall volatility and enhances returns.
Triad 1yr. -5.91% 5yr. 0.15% 10yr. 4.34%
ABNDX 1yr. 2.55% 5yr. 2.77% 10yr. 4.54%
AIVSX 1yr. -7.41% 5yr. -2.03% 10yr. 2.87%
ANWPX 1yr. -12.93% 5yr. -0.54% 10yr. 5.47%
This shows how bonds diversify a portfolio consisting of only equities.
The desirable characteristic of matching these three is the likelihood that when one is experiencing down times, the others are not. All three will be paying dividends which tends to help give some downside protection and when the overall market conditions are favorable, these three ETFs will tend to display a smoother increase in value when measured at the portfolio level. Such mixing and matching ETFs is what can expand the versatility of these relatively new investment vehicles.
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Jeffrey L (Jeff) Stouffer is associated with Kingsview Asset Management, LLC and manages the Alexandria Virginia office. He has earned the privilege of using the CAIA and CFP® marks and holds several FINRA licenses. As a practicing financial advisor serving the needs of individual and owners of businesses, he believes in using a wide range of strategies including alternative investments. For additional information, he can be contacted via email at jeff.stouffer@kingsviewassetmanagement.com
jlstouffer has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
