ETFs In Barron's

Barron's had two articles about ETFs that you can read here and here if you subscribe. They both include the standard fare, questioning whether there are too many funds, quotes from people at Vanguard and Morningstar poo-pooing them and so on.

There is one point made that ties in with something I have been trying to convey about the sector and sub-sector ETFs; Consider that the handful of industry groups making up a major sector typically produce a wide array of returns. This was in the context of the telecom sector but it applies elsewhere and from a slightly bigger view there are times where isolating a sub-sector can lead to better returns and I don't think getting something like this correct is impossible for do-it-yourselfers as so many ETFs naysayers seem to believe.

As with any investment product there will be some small percentage of investors that use these incorrectly and we will no doubt read about them at some point.

Now that we have that out of the way these ETFs allow investors, looking to manage their own diversified portfolio, to capture very specific themes, in a reasonable proportion without taking single stock risk.

Here's an example of how this could look with the financial sector. I don't own any of the items listed (but I have written about a couple of them), I am just using them as examples. The S&P 500 is 22% financials so let's assume we want to target a slight underweight at 20%.

Citigroup (the common stock) 4% of the entire portfolio
streetTRACKS KBW Regional Banking ETF (KRE) 7%
PowerShares Dynamic Insurance Portfolio (PIC) 4%
iShares US Broker Dealer Index Fund (IAI) 3%
WisdomTree Asia Ex-Japan (DNH) 4% (this is 50% financials so it only counts 2% to the sector)

This mix isolates a few narrower themes, it yields 2.34% (I only took half the dividend from DNH into account as only half of the fund is financials) which out yields XLF by ten basis points and IYF by 34 basis points. Obviously it has a smaller market cap than either XLF or IYF which at times will mean it outperforms. I included Citigroup for some mega cap exposure.

This is not a sector allocation I am considering, I can capture better yield and more countries using common stocks but it makes a point that seems to be lost on a lot of people writing about the evils of sector ETFs. As opposed to saying why "most individual investors should leave these alone" perhaps some of the media could roll up their sleeves and actually do a little work to understand how to use them and actually write about that in an article.

C'mon in, the water's fine.