Recent Sell – BMO Utilities ETF

BuySell

A sector that has been under-represented in my portfolio has been the Utilities sector. The only exposure I had to the sector was via an ETF – BMO Equal Weight Utilities Index ETF (ZUT.TO). Even though the exposure has been small and the only one, I decided to liquidate my holdings in the ETF and will be looking to purchase some stocks in the sector instead. The ETF provided good stability and regular monthly income. However, there were a few things that bothered me that caused me to sell the position.

  • After owning the fund for close to 3 years, the fund price has remained flat – although I was earning 4% on the investment. While I dont really look for capital gains per se, I know that the income isnt being compounded as is achievable via dividend growing companies.
  • A thin exposure of just 12 companies – all in the Canadian sector, although some companies have operations in the US.
  • An expense ratio of 0.55% for owning just 12 companies! I dont really gain much of a diversification and dont see the value of paying 0.55% for such a thin ETF.
  • In addition, more than 10% of the exposure to one company – Just Energy Group Inc (JE.TO), which last time I checked had some horrible financial figures. I do not want any exposure to this company – let alone a 10% exposure while paying that damn fee for the privilege of investing.
  • No dividend growth.

With this sale, I lose $90.48 in forward annual dividends.

What’s next for those funds from the sale? I am looking to pick up some shares in individual utility companies. Some of the companies on my shortlist are:

  • Diversified Utilities
    • Algonquin Power & Utilities Corp (AQN.TO)
    • Atco Ltd (ACO.X.TO) / Canadian Utilities (CU.TO)
    • Brookfield Infrastructure Partners LP (BIP.UN.TO)
    • Brookfield Renewable Energy Partners LP (BEP.UN.TO)
    • Duke Energy Corp (DUK)
  • Electric Utilities
    • Consolidated Edison Inc (ED)
    • Fortis Inc (FTS.TO)
    • The Southern Company (SO)
  • Water Utilities
  • Natural Gas Utilities
    • ONEOK Inc (OKE)

What are your thoughts on these companies mentioned? Are there any other companies that I should be looking at?

Emerging Market Bonds

Back in February, I shared details of one of our long term plans for my wife’s portfolio of moving funds from an expensive mutual fund to low cost diversified ETF portfolio. This was also one of our financial goals for the year, which we were happy to put behind us. The post Building an ETF Portfolio can be found here. The long term goals of the portfolio remain the same as discussed, which includes passivity (following the passive investing route), simplicity, diversification, expense check, and dollar cost average into the selected funds. One thought that I’ve been debating for that portfolio is adding diversification in the fixed income portion. The fixed income exposure, which makes 40% of my wife’s portfolio comes from a single ETF called the BMO Aggregate Bond Index ETF (ZAG.TO). The ETF consists of high quality bonds (43% of the fund is made of AAA rated bonds) – consisting of federal, provincial and corporate debt.

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Building An ETF Portfolio

Regular readers of this blog are aware that we recently sold my wife’s expensive mutual fund holdings a couple of weeks ago. This has been long time coming and we finally got the funds transferred to a discount brokerage. Now comes the part of picking the ETFs. This article captures the exercise of building an ETF portfolio. Hope it helps you in your decision if you decide to go the route of passive investing.

The overall strategy remains as I mentioned earlier: my wife’s portfolio will use index funds via ETFs to invest in the broad markets using some rules of thumb in mind as discussed below. My portfolio will continue investing in more focused dividend growth stocks.

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Global High Yield Dividend ETFs


In a global economy, today’s investors need exposure to international equities to take advantage of the growth and dividend income that they provide. Global High Yield Dividend ETFs provide a great way to invest in international equities without the elevated risk of unknown individual corporations in oversea markets. A lot of international equities pay a handsome dividend and provide fantastic investment returns, so an investor who does not have access to buy them directly can gain access to these corporations via the following ETFs.

In my hunt to increase my current income coupled with a need for global diversification, I started exploring options for International Dividend ETFs. The largest and most popular ETFs with the juiciest yield are listed below. All holdings in the funds discussed below are in equities.

  1. Global X SuperDividend ETF (SDIV) tracks the performance of 124 equally weighted companies that rank among the highest dividend yielding equity securities in the world.
  2. Guggenheim S&P Global Dividend Opportunities Index ETF (LVL) is comprised of 101 common stocks, MLPs and ADRs that offer high dividend yields chosen from countries included in the S&P Broad Market Index. The constituents consist of stocks, MLPs and ADRs with market cap greater than $1.5B.
  3. SPDR S&P International Dividend ETF (DWX) includes 116 companies with a biased weighting towards mid-to-large cap.
Fund Name
Ticker  MER
%
Yield
%
No of

Holdings

Market Cap Breakdown
Mega-Large-Mid-Small-Micro
%
Global X SuperDividend ETF SDIV 0.58 6.55 124 9.2 – 17.2 – 45.1 – 19.5 – 5.14
Guggenheim S&P Global
Dividend Opportunities Index ETF
LVL 0.60 6.52 101 10.1 – 24.6 – 50.6 – 12.8 – 1.75
SPDR S&P International Dividend ETF DWX 0.45 6.76 116 15.2 – 33.73 – 43.47 – 2.05 – 0

Geographic Allocation

SDIV has a slight inclination towards equities based in the US with a 27% allocation. The other two funds have highest fund allocation in Australia with DWX completely invested in non-US equities. All funds have the highest regional allocation to Europe with SDIV at 32.59%, LVL at 35.14% and DWX at 39.93%.
ETF
 US / Intl
Allocation

%
 Developed / Emerging

%
Top Allocation
 SDIV 27 / 72 94.34 / 4.06 USA (27%)
LVL 16 / 83 86.89 / 13.07 Australia (20%)
DWX 0 / 99.85 83.31 / 14.44 Australia (22%)

 

Sector Allocation

SDIV’s largest sector allocation is in Real Estate. Both LVL and DWH have largest sector allocation in Communication Services. For the most part, LVL and DWH have very similar sector weightings.
Sector
 SDIV

%
 LVL

%
 DWH

%
Financials 19.05 15.23 14.73
Industrials 9.79 9.73 12.17
Materials 2.8 6.51 4.92
Energy 5.13 12.79 12.59
Real Estate 21.76 9.6 9.01
Cons Cyclical 5.34 6.71 6.13
Cons Defensive 2.67 4.42 1.41
Comm Services 11.62 18.37 17.51
Technology 2.68 0 0.66
Healthcare 4.81 3.12 2.75
Utilities 12.74 13.48 14.23

Metrics To Judge By

Metrics such as sector allocation, number of holdings, expense ratio fees, annual yield, market cap size exposure etc need to be considered before I make a final decision on the ETF to pick.
  • Number of holdings: When investing in ETFs, I like broader indices and look for more holdings as I like to mitigate risk. SDIV has the highest number of holdings with 124 equities in total. Winner: SDIV.
  • MER: I like to keep my costs down – simple as that. Winner: DWX.
  • Yield: I have already dropped a couple of names from this list of global dividend ETFs yielding less than 2%. Since most of the funds yield the approximately same, this will be a tie on the yield metric Winner: Tie.
  • Geographic Allocation: I am already invested in a lot of US stocks and the point of this exercise is to look for international diversification, I would want higher more non-US exposure. Winner: LVL and DWX.
  • Sector Allocation: I like more balanced funds. SDIV is very concentrated in Financials with an allocation of almost 40% Financials + Real Estate. Winner: LVL and DWX.
  • Distribution frequency: I like to see the distributions paid out frequently. SDIV pays on a monthly schedule whereas LVL and DWX pay on a quarterly schedule. Winner: SDIV.
  • Stable Income: The objective of this exercise and the potential holding needs to provide a stable income stream. Although all funds have the same annual yield rate, SDIV is the only fund that has the same stable payment month after month. Both LVL and DWX have a variable pay amount for each quarter. Winner: SDIV.

Final Score: Based on the metrics above, giving a point for each metric we get: SDIV = 4. LVL = 3. DWX = 4.

I am still undecided which one offers the best rewards, but I like DWX even though it loses on the points of # of holdings, distribution frequency and stability of income, the ETF has the lowest fee, good geographic allocation with a decent exposure to emerging markets (which SDIV lacks) and the overall sector allocation.

What do you think of these Global High Yield Dividend ETFs? Do you own any of these ETFs in your portfolio? What are your thoughts on the metrics discussed above? I would love to hear your thoughts on these ETFs. Leave a comment below to start a discussion.

Disclosure: None. My full list of holdings can be found here.This article first appeared on roadmap2retire.com


Image Source: freedigitalphotos.net

China ETF

Does your portfolio have the exposure to the future largest economy in the world? The International Monetary Fund (IMF) predicts that China’s economy will overtake that of USA in 2016. Chinese economy is now growing at a rate of 7.5-7.8 percent – that is a mouth-watering rate of growth for any investor. The China Index ETF comparison in this post provides an overview of the state of coverage, fees, yield, allocation and returns amongst the available ETFs.

 

In the past, I had held mutual funds tracking the Chinese index, but decided to sell them as I decided to get out of mutual funds due to the high MER fees and move into dividend growing corporations. As it turned out, I inadvertently timed it right – as the recent slowdown in the Chinese economy resulted in a fall in the overall market. However, the Chinese market is heating up again and ignoring the Chinese economy from a portfolio just seems like a missed opportunity.
I have partial exposure via the Vanguard Total International Stock ETF (VXUS), which has a 4.37% of its portfolio holdings in Chinese equity. I am considering adding one of the following index ETFs to my list of index funds to capture part of the Chinese growth.

Fund Name
 Ticker  MER Yield No of
Holdings
YTD
Perf
iShares China Large-Cap ETF FXI 0.72% 2.42% 27 -6.92%
iShares MSCI Hong Kong
Index Fund
EWH 0.52% 2.77% 46 4.17%
iShares MSCI China Index Fund MCHI 0.61% 2.16% 139 -3.92%
SPDR S&P China ETF GXC 0.59% 2.15% 219 0.82%
PowerShares Golden Dragon
Halter USX China Portfolio
PGJ 0.60% 0.86% 67 49.58%
Guggenhiem China Small Cap ETF HAO 0.70% 1.27% 248 2.79%
Guggenhiem China All-Cap ETF YAO 0.70% 2.12% 203 2.66%
iShares FTSE China Index Fund FHCI 0.72% 2.28% 159 -3.85%
iShares MSCI China
Small Cap Index Fund
ECNS 0.60% 2.57% 338 5.33%
WisdomTree China Dividend
ex-Financials Fund
CHXF 0.63% 2.82% 68 -8.16%
iShares MSCI Hong Kong
Small Cap Index
EWHS 0.59% 13.21% 90 12.82%
First Trust China
AlphaDEX Fund
FCA 0.80% 2.83% 52 12.08%

Sector Allocation

Most funds seem to be fairly well balanced with the exception of FXI and EWH. From first looks, the most balanced funds are GXC, HAO, YAO, ECNS, CHXF and FCA. The rest of the funds are concentrated in one of the sectors with weightage of over 30%.
Sector
FXI EWH MCHI GXC PGJ HAO YAO FHCI ECNS CHXF EWHS FCA
Financials 52.3 27.76 35.52 29.95 1.32 2.8 29.23 36.88 1.06 10.88 5.57
Industrials 6.50 6.01 9.04 4.21 18.53 6.82 6.67 16.57 14.15 5.61 14.68
Materials 5.78 5.92 6.34 1.8 12.98 6.11 5.76 12.6 18.19 5.55 24.11
Energy 11.92 12.92 10.88 7.12 4.81 11.85 12.85 5.67 17.39 2.58 2.61
REIT 2.37 32.69 3.81 3.88 1.19 12.32 4.36 3.53 12.03 12.08 23.24
Cons Cyclical 3.23 17.35 6.22 6.62 12.02 14.25 6.95 5.88 16.95 9.29 36.44 13.46
Cons Defensive 5.04 5.75 5.67 7.58 5.87 2.14 4.65 10.77 0.51 1.33
Comm
Services
16.74 1.16 12.06 9.12 9.19 1.14 9.81 11.48 0.44 14.77 4.18 2.81
Technology 7.02 1.94 7.72 13.8 48.84 13.44 14.32 7.47 15.3 7.55 19.84 2.55
Healthcare 1.25 1.98 8.5 6.61 2.02 0.89 7.55 1.9 0.9 2.24
Utilities 11.68 2.99 2.31 0.48 5.54 2.64 3.49 5.2 5.99 7.05

My Thoughts

Metrics such as sector allocation, number of holdings, expense ratio fees, annual yield, market cap size exposure etc need to be considered before I make a final decision on the ETF to pick.
 
FXI and EWH are the largest of the available funds with assets of over $5.7B and $2.2B respectively. However, those two funds are the least diversified and for this reason, I intend to avoid them.
I intend to buy ETFs which have a broad exposure to the market and not concentrated in one or two sectors. Going by the number of holdings, I eliminate funds that have less than 100 stocks, as the index is not broad enough. This removes PGJ, CHXF, EWHS and FCA from my consideration.
MCHI and FHCI are too concentrated in one sector (Financials) with 35.52% and 36.88% respectively and so, I would avoid these two funds.
HAO and YAO seem to be built very similar to ECNS and GXC respectively. They have similar respective sector weightage but the expense ratios, yields and broader holdings make the SPDR and iShares funds more attractive. Comparing GXC and YAO, GXC MER 0.59%, yield 2.15% and YAO MER 0.70%, YAO yield 2.12. Comparing  ECNS and HAO, ECNS MER 0.60%, yield, yield 2.57%, 338 holdings and HAO MER 0.70%, yield 1.27% and 248 holdings.

So, my shortlist consideration for investment in the China index ETFs are: GXC and ECNS. They both have interesting targets – the GXC targeting all China index and the ECNS targeting the small caps – which could potentially have better returns.

What do you think of the available China index ETFs? Do you have any exposure to China in your portfolio? Do you own any of the ETFs mentioned above?

Disclosure: None

Disclaimer: The information provided here is for educational purposes only. All opinions here are my personal opinions and should not be taken as financial advice. I am not qualified to be a financial advisor. Always consult with your financial advisor before investing in any of the companies mentioned on this blog.