No, not that Financial Crisis but the one in my portfolio. Over the last quarter my investments in the financial sector stayed put at 10.8%, in spite of not buying any individual financial stocks. I didn’t have to look far to find the problem. At the end of June I had the following ETFs and Closed-end Funds in my income portfolio:
Alpine Total Dynamic Dividend Fund – 16.29% Yield – (AOD)
Alpine Total Dynamic Dividend Fund (the Fund) is a diversified, closed-end management investment company. The Fund has an investment objective to invest in equity securities that provide high current dividend income. The Fund also focuses on long-term growth of capital as a secondary investment objective.
% Financial: 19.04%
SPDR S&P Dividend – 5.02% Yield – (SDY)
The Fund seeks to replicate as closely as possible, before expenses, the price and yield of the S&P High Yield Dividend Aristocrats Index. The Fund uses a passive management strategy designed to track the price and yield performance of the Dividend Index.
% Financial: 33.97%
Vanguard Financials ETF – 4.08% Yield – (VFH)
The Fund seeks to track the performance of a benchmark index that measures the investment return of financial stocks; specifically the MSCI U.S. Investable Market Financials Index. This is an index of stocks of large-, mid-, and small-size U.S. companies within the financials sector.
% Financial: 97.93%
Vanguard Dividend Appreciation ETF – 2.02% Yield – (VIG)
The Fund seeks to track the performance of the Dividend Achievers Select Index that measures the investment return of common stocks of companies that have a record of increasing dividends over time.
% Financial: 12.68%
Vanguard REIT ETF – 5.38% Yield – (VNQ)
The Fund seeks to track the investment performance of the Morgan Stanley REIT Index by investing at least 98% of its assets in stocks issued by real estate investment trusts.
% Financial: 0.00%
Vanguard High Dividend Yield – 3.65% Yield – (VYM)
The Fund seeks to track the performance of a benchmark index that measures the investment return of common stocks of companies that are characterized by high dividend yield.
% Financial: 23.83%
As you can see all the ETFs and closed-end funds above, except VNQ, include heavy allocations in the financial sector. Since I am targeting no more than 10% investment in the financial sector, this presents a problem. So what’s the solution? Here is what I am going to do:
- Increase my maximum allocation to the financial sector to 15%: As you can see from the above, virtually any income-based ETF or fund is going to be financial heavy. At 15% my overall weighting would be well below all the above except VIG and VNQ. I would not be comfortable exceeding a 15% weighting, but I am comfortable at that level.
- Put VFH “On The Shelf“: At 97.93% financial, each purchase of VFH is the virtual equivalent of purchasing an individual financial stock. Thus, I will not make any new VFH purchases and hold my existing position as long as it performs as a good dividend investment.
- Put SDY “On The Shelf“: SDY’s 33.97% financial weighting puts pressure on my overall financial allocation each time I purchase it. Like VFH above, I will not make any new VFH purchases and hold my existing position as long as it performs as a good dividend investment.
- Put VYM “On The Shelf“: At 23.83% financial weighting, VYM will be treated as SDY above for the same reasons.
This exercise demonstrates the importance of knowing your asset allocation, including what is hidden in ETFs and funds. I have decided to take take this portion of my income portfolio in a different direction. Thursday, we’ll look at its new focus and where it fits in my overall asset allocation.
(Photo: sanja gjenero)
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