Sunday, December 2, 2012

Exchange Traded Funds

In general I'm opposed to ETFs (and mutual funds) since you are essentially paying someone else to do work for you.  Maybe I'm just too proud or too cheap, but I'd rather do it myself.  That extends beyond investing into other areas of my life such as car maintenance and repairs.  But there is a real advantage of being a nimble self directed investor: fees!  Those pesky fees add up over time and is precisely why index funds never match the actual index.  Over decades those little expense ratios add up to thousands and thousands of dollars.  I was a fund investor in the past and was not happy with the results.

Explaining why ETFs suck isn't why I'm writing this post.  Rather, the real reason is that I'm actually considering buying a couple.  Yeah really! 

Foreign stocks: a glaring hole in my portfolio.  In a perfect world foreign stocks would pay dividends quarterly and not have dividends withheld just like my favorite dividend champions.  Unfortunately such conditions are very rare.  American stocks spoil us with a level of predictability and stability not seen anywhere else (with the exception of Canada).  But there are tons of quality foreign companies such as Nestle, Novartis, and National Grid.  The problem is I simply do not want to be paid only once or twice a year!  I will not accept that.  So I'm left looking at stocks from Canada and a few from the UK.  I currently own TD and EIFZF plus monitor CM, EMRAF, UL, and BP.  So I follow a grand total of six stocks outside the US....  There are a lot more quality companies around the globe than that!

For the price of an ongoing fee I can turn annual and semiannual dividends into a quarterly paying ETF.  Now I spent a few hours looking at various foreign dividend funds and couldn't find a single one where the distribution stream was smooth and predictable.  No matter what I do it's going to be bumpy.  But I can gain exposure to a bunch of great companies I would otherwise not be interested in, avoid the withholding tax (the fund should deal with it), and get that quarterly dividend I require.

I have access to 30 no transaction fee iShare ETFs with my Fidelity brokerage account.  I can buy small lots of $50 or $100 without worrying about commissions.  Anyways one particular fund caught my attention:

iShares Dow Jones International Select Dividend Index Fund (IDV):
  • Holdings: 101
  • Dividend Yield (ttm): 5.19% (paid quarterly,YAY!)
  • Expense Ratio: 0.50%
  • P/E: 15.1 / P/B: 2.63 / Beta: 1.49
  • Major Holdings: British American Tobacco, Eni, Commonwealth Bank of Australia, Royal Dutch Shell
  • Other Holdings: National Grid, Seadrill, Bank of Montreal, Emera, Vodafone
  • Countries: 21% Australia, 17% UK, 7% Hong Kong, 6% France, 6% Italy
There are definitely some quality holdings in there, but to be honest I've never heard of 80% of them.  I will consider starting a small position in this fund for income and diversification purposes.  Being able to make purchases with extremely small dollar amounts is a huge plus but comes at the cost of the dreaded expense ratio.


  1. Nice idea. On one hand you add on a management fee, but on the other hand you aren't paying commission. Over the short term (up to one year), assuming an expense ratio of 0.50% and commissions of $7.95, a purchase of $1,590 of this ETF without commission is the same as purchasing the equivalent amount of stock without a management fee.

    I share your thoughts about mutual funds and ETFs, but in some cases they do offer some benefit. International stocks is one example. I was also researching some ETFs and ETNs which invest in MLPs, offering diversification and simplification of tax filing.

    1. Yes you are right about the fees. I've held the vast the majority of my holdings over a year. So far the list includes the following: T, BWP, JNJ, UNS, INTC, LTC, PG, COP, KO, GIS, PEP, CVX, RTN, ABT, PM, EIFZF, AVA, ITW. I don't mind paying a fee once since I will hold these for many many years. An ongoing fee is troublesome because it doesn't stop. 10 years from now when I still own KO, PM, PG, etc. the 7.95 commission I paid won't matter. 20 years from now it's very one sided.

      When I get into bonds (ie. when rates rise) I'll attempt to set up a bond ladder to make the income consistent. Either that or target date funds such as guggenheim bullet shares. Yet another option is exchange traded debts, but most of those are 40-50 years in duration.

  2. I find some indexed ETFs to be useful to augment a dividend portfolio.

    -VEU provides solid international diversification to an otherwise US-centric portfolio.
    -VGT provides an indexed solution to tech and IT companies to augment a portfolio that might not otherwise have much tech exposure.
    -VB provides small cap exposure to a portfolio that might be shifted towards large caps.
    -BND provides bond exposure.

    1. Thanks for the suggestions.

      VEU has some awesome companies in it! Unfortunately it doesn't pay quarterly (looking at its distribution history) so it's not one I would consider. I'm looking for something that will take in semiannual and annual dividends but pay me quarterly/monthly. The expense ratio and company selection is top notch though. I'm not looking at IDV for the yield, but rather the quarterly payment schedule!

      I'm happy with my other allocations at this time. I try to hold some small and mid caps. Holdings such as LTC, SBSI, EIFZF, AVA, UNS, SNH, BWP, LINE, & OMI fall into that category. 10% of my assets are in fixed income, although most of it is in my TSP (federal employee 401k). I decided since I don't like my TSP choices that I would just dump it all into fixed income for allocation purposes. If interest rates rise in the future I would increase my fixed income allocation. I'd be more comfortable at 25-30% fixed income but cannot justify owning too many bonds right now!

  3. I love exchange traded funds. The great thing about exchange traded funds is the ability to concentrate money in a narrow sector ETF like solar steel wind nuclear coal when their trading at bargain basement levels and their off their highs by a tremendous amount. Your risk is much less when you buy a basket of stocks though a narrow sector ETF because not all of the stocks in the narrow sector ETF can go out of business unlike buying a single security in a narrow sector. I also like single country ETF'S. This creates the ability to buy into another countries stock market when its trading at bargain basement levels. And because theirs now dozens of single country ETF's today theirs bound to be at leaet a few great bargains in single country funds.

    1. Yes ETFs do have uses and are obviously quite popular. I never plan on buying a company that will go out of business so I'm not as concerned with that however. I tend to buy "safe" companies that are unlikely to go bankrupt. People will always need electricity, shampoo, food, etc.

      Spending patterns and behaviors do change over time but I hope I'll be able to recognize failing companies before the price goes to zero. I spend a lot of time reading about and researching my favorite companies. Surely I will make some mistakes along the way. That's just reality!

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