Advisors Favoring Dividends & Diversity

March 06, 2008

As volatility continues, portfolio managers seek out ETFs with lower correlations.


With stock markets falling in the U.S. and commodities booming, some advisors and independent money managers are reevaluating their current lineups of exchange-traded funds.

But market conditions are only one part of the equation. For some, the stream of new ETFs and exchange-traded notes coming out lately has led them to review their options.

"A new commodities ETF or ETN is coming out almost every week," said Anthony Welch, an advisor at Sarasota Capital Strategies. "We're not changing our weightings these days as much as using this time when the market's down to take a closer look at whether we've picked the best funds on the market."

While sticking with commodities, he has sold an oil and gas ETF and switched into the ELEMENTS Rogers International Commodity ETN (AMEX: RJI). The ETF launched late last year and offers different types of exposure to the market than its rivals, Welch says.

"This ETF has commodities that aren't historically in other funds," he said. "For example, it has rubber exposure. Another is barley. Both of these commodities are doing very well under current market conditions."

At 0.75% in expenses, RJI isn't the cheapest commodities ETN. "But it's still reasonably priced in our view. And with exposure across metals, agriculture and energy, it has a unique profile for this type of a fund," Welch said.

With the strong run-up in raw materials prices of late, Sarasota Capital's managers say it's also a good time to make sure that risks in their clients' portfolios are efficiently diversified.

"Typically, commodities bull markets last for many years," Welch said. "So we think this is the third inning of a nine-inning game. But we also think that prices could pull back somewhat in the short term."

Doug Wilde, chief portfolio strategist at UBS Wealth Management in the U.S., says while energy- and commodities-related funds still play a role in the firm's ETF portfolios, his most recent moves have been to boost exposure to dividend-paying stocks.

"Dividend-paying sectors and companies weren't rewarded last year to the extent they had been in prior years. So we think those companies will appreciate more and we're tilting our investments to those companies and sectors," Wilde said.

At the end of 2007, he lightened up on tech and added to telecom. In that sector, he's using the Vanguard Telecom Services ETF (AMEX: VOX). "It's more of a pure-play than something like a comparable SPDRs ETF, which basically combines tech and telecom," Wilde said. "It's also the cheapest on the market."

Telecom firms as a group are paying dividends around 3.5% right now. "That's about a 50% premium over the broader market," Wilde said. "And compared to the 10-year Treasury, which is yielding around 3.6% now, VOX is becoming increasingly attractive."

Gary Gordon, president of Pacific Park Financial Inc., has reentered iShares Dow Jones Select Dividend Index (NYSE: DVY).

It's a name he's quite familiar with after owning the EFT for nearly four years before selling out last summer. That was after financials as a whole had started to deteriorate as a result of the subprime loan meltdown.

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