WASHINGTON. In our first column discussing our new focus on ETFs, we explained the current dilemma facing individual investors. In our second column in this series, we explored our evolving rationale further. Today, we offer our current list of carefully chosen ETFs and CEFs that have been productive for us thus far in 2018. By making these changes to our portfolios, we hope to achieve a state of ETF Nirvana. Perhaps you can achieve ETF Nirvana, too.
Alps Alerian MLP (AMLP). An ETF that primarily invests in oil and gas master limited partnerships (MLPs). While its current yield, a little over 8 percent, is less than the yields of some individual MLPs, AMLP has one big advantage. You don’t have to fill out the asininely complex Schedule K-1 forms you have to file with the IRS each year if you invest in individual MLPs. Our holdings are currently up 13.5 percent in 2018.
Cohen Steers Total Return Realty CEF (RFI). Well rated closed-end investment fund (limited number of shares) that primarily invests in domestic and international real estate. One of our newer investments in this part of our portfolio, we’re attempting to average down on these shares, and have currently lost just under 1 percent. Current yield: 7.74 percent.
Communications Services Select SPDR (XLC). As we noted in one of our more recent articles, this brand new ETF follows the soon-to-be replacement for the current S&P Telecommunications index. S&P will essentially discontinue this index in mid-to-late September, given that it’s virtually dead. That’s because there are remarkably few telephone companies left.
The Telecommunications index will morph into the new Communications Services index in September. The telcos will still be in there. But so, too, will be a raft of new “communications services” stocks like (ta-da!) Netflix (NFLX) and Google, aka Alphabet (GOOG and GOOGL) among others. In other words, an essentially dead S&P index will suddenly become one of the most exciting indexes you can find. The new XLC SPDR ETF will track the revised index.
Given that few have noticed this one yet, we’re trying to get into this one on dips. But those, unfortunately, have been tough to get. We’re already up on our small holdings by x.
No dividends as yet. Telcos have traditionally paid high dividends. But since the majority of the new ETF’s holdings will be tech-y, yield here will likely be unimpressive. Clearly, this one’s for capital gains.
BTW, there’s an alternative offered by Vanguard, symbol VOX. However, Vanguard is “evolving” to the new model in this fund, and it doesn’t seem to be working as well as XLC, at least at the moment. Stay tuned.
Invesco High Income 2023 CEF (IHIT). This is what’s known as a “targeted” closed end fund. Consisting primarily of good quality but relatively high-yielding bonds, the CEF went public at approximately $9.83 per share, and fluctuates in a narrow band every trading day. It’s investments mature in 2023, as its title implies. At that point, IHIT will cease to exist.
IHIT aims to return approximately $9.83 to investors who hold it at that time. But no guarantees on that final redemption price. This means investors should try to buy this one any time it goes modestly below $9.83. In the meantime, you get an annual yield of approximately 6.12 percent, which isn’t bad in the current environment. It’s paid out monthly, a nickel per share. This one’s for the yield only. Capital gains may or may not happen. And, of course, you could sell this one before its 2023 “sell by” date. We’re currently up 0.55 percent on IHIT.
Invesco Preferred Stock ETF (PGX). This is a portfolio of reasonably OK quality preferred stocks. Current yield is a nice 5.71 percent. The fluctuating payout is roughly 0.067 cents per share. We’re currently off 0.68 percent on this one, which we’re still in the process of acquiring by averaging down. However, this ETF seems more than usually influenced by Fed moves and we might decide to back out of it. We’ve been in this one before, however, and were amply rewarded. Iffy at the moment, though.
Invesco S&P 500 Equal Weight Technology ETF (RYT). Invesco just acquired a series of Equal Weight ETFs from Guggenheim, and this is one of them. It retains its former trading symbol. There are other more popular ETFs in this area, but this one trades without a commission in our brokerage, so we go with this one. An “equal weight” ETF equalizes all the holdings in the index as opposed to the usual way an index ETF is structured. I.e., the larger stocks are a larger proportion of the index, the smaller ones, smaller.
As a result, most equal weight ETFs are slower moving than the cap-weighted ETFs. Meaning that you make money slower and steadier. And in bad times, you lose money slower and steadier. As older investors ratcheting down on risk, we prefer slower and steadier either way.
As with most things tech, yield here is lousy – just 0.8 percent or so, payable quarterly. But tech-anything is all about capital gains. We’ve been slowly acquiring these shares in dribs and drabs since 2016, and are currently ahead by a whopping 20.5 percent. We continue to buy 1-2 shares on significant dips. Even though this one is less volatile than non-equal weight tech ETFs, it’s still a bouncy ride.
iShares Mortgage REIT ETF (REM). As with AMLP, you avoid getting those bloody Schedule K-1s you have to file with the IRS, making the slight decrease in yield worth it. The REITs in this portfolio invest only in REITs that buy and sell mortgages and (sometimes) mortgage servicing rights. Timing in this one is everything. We’re holding this one, which we acquired earlier, but we might not be buying any more shares right now in an increasing interest rate environment, which drives these shares down. Yield is currently 10.22 percent. We’re ahead, investment wise, by 4.77 percent at the moment.
Pimco Dynamic Income CEF (PDI). This Morningstar top-rated CEF quietly brings in a great yield in a weird investing environment. Investing primarily in medium term U.S. Government securities, foreign government securities and some others, it actively trades positions to keep the fund adjusted to the current interest rate environment. It can also use options and establish short positions, part of the reason its performance in a rising interest rate environment is extraordinary. Current yield is an astounding 8.14 percent. We’re also currently up 6.44 percent from where we started, even though we didn’t buy these shares for capital gains. There are a few risks here. But Pimco has been around a long time and has handled risk with extraordinary skill. No guarantees, of course. But we’re just sayin’. Price probably a tad high right now for new investors.
Schwab 1000 Index ETF (SCHK). We should probably point out that we’ve worked for years with Charles Schwab (SCHW). When Schwab started up their own ETFs a few years back, selling them without any commission, we gave them a try and have stuck with them, as their ETFs have performed quite well for us. Your brokerage may have equivalent products available without commission so you may consider them. It’s a big advantage when it comes to your own personal P&L numbers.
This ETF is almost brand new in the Schwab stable. It’s based on the broker’s own limited index of major stocks. We’re in it right now to see how it works, so we can’t yet judge its longer-term performance. As of now, we have only a small position, which is currently up by 3.7 percent. Yield not yet established.
Schwab Fundamental U.S. Small Company ETF (FNDA). Roughly 2 years ago (we forget how long) Schwab augmented its normal index ETFs with an equal set that was structured to trade on “fundamental” parameters generally defined as “smart beta.”
Rather than get into that here, this strategy, increasingly common on Wall Street, assembles stock indexes based more closely on “quant” algorithms. In other words, such indexes also take into account the quality and consistency of a company’s earnings when assembling or adjusting index portfolios. This one’s based on the Russell U.S. Small Company stock index, as adjusted for performance.
FNDA currently yields 1.17 percent, but the big deal in small stocks is the search for capital gains. In the current weird investing climate, 2018 yield thus far for us is a nifty 9.3 percent. We continue to acquire shares on dips. In addition to SCHG (below) this is our other favorite ETF Nirvana candidate for 2018.
Schwab U.S. Broad Market ETF (SCHB). We sold this one in the spring for a profit, but are now creeping back in. This one follows the Dow Jones U.S. Broad Stock Market Index, which essentially covers the U.S. stock market as a whole. Our tiny but occasionally growing new position in SCHB is already up 2.42, and the shares equal a so-so 1.7 percent. However, this is another ETF you get into for the capital gains, not the yield.
Schwab U.S. Large Cap Growth ETF (SCHG). As with the earlier noted RYT, this is an ETF we’ve been buying for a long time in dribs and drabs, back to some time in 2016 when we first contemplated trying out an ETF shift in our portfolios. SCHG tracks the total return of the Dow Jones U.S. Large Cap Growth Total Stock Market Index of roughly 750 of America’s largest publicly traded companies. Yield again is low, 0.94 percent at the moment. But we continue to be very happy with our 2018 gains, currently 23.77 percent, considerably above our usual personal stock picks. We’ve acquired most of our positional goal on this one, although we’ll still buy a couple shares here and there if the market crashes. Right now, this one feels the closest to achieving ETF Nirvana, at least for us.
Schwab U.S. Large Cap Value ETF (SCHV). “Value” ETFs are designed to track lagging large cap stocks that are persistently undervalued by traders. So the theory goes, investors will eventually figure this out and bid these stocks up nicely, delivering uncommonly good capital gains for those who choose to be patient. This ETF is based on the equivalent Dow Jones Large Cap Value Total Stock Market index, which contains currently boring but quite robust stocks like Microsoft (MSFT), JP Morgan Chase (JPM), Exxon (XOM), Johnson & Johnson (JNJ) and so forth.
Value stocks have been stinkers for quite some time in this market. But you need a lot of patience in this investing class. Current yield = 2.61 percent. Our current gain in 2018: a measly (but typical) 1.95. Long way to go for ETF Nirvana here, but we can wait.
Details: Of the ETFs and CEFs listed above, the following are NOT commission-free for us: AMLP, RFI, XLC, IHIT, PGX, PDI and REM. The remaining listed investments trade commission-free at Schwab. Your mileage (and brokerage) may vary.
Achieving ETF Nirvana: Here’s proof
Our total current 2018 return (not including dividends) in our developing, mostly-ETF positions = 9.4 percent. Feels like ETF Nirvana to us.
Our total current 2018 return (not including dividends) on our now-shrinking common stock portfolio = – (minus) 5.42 percent. While that does currently include our bodacious mistakes in Allergan and Alibaba, it’s clear at this point in 2018 that the ETF portion of our portfolios is doing a lot better. Plus, we don’t have to pay all that much attention to these holdings on a day-to-day basis.
That’s why we’ll continue our shift toward a heavier ETF weighting in the months to come. Hopefully, we’ll achieve a blissful state of total ETF Nirvana in our portfolios by COB, December 31, 2018. #
Note: This column is part of our running commentary describing the triumphs and pitfalls that befall us in trading our own portfolios. Nothing in this column should be construed as a buy or sell recommendation. This column’s intent is to be educational only. Whenever you invest, there is still no substitute for conducting your own due dilegence research before you invest. Please also note: We did not receive and have never received any compensation from Charles Schwab and Company or from any of the companies that sponsor the investments discussed in this column.
Headline image: Rishabhanatha, believed to have lived over a million years ago, was the first Tirthankara (spiritual guide) to attain nirvana. (Image via Wikipedia entry on the spiritual state of Nirvana. CC 3.0 license.)