A reader left the following."and looked at two of my ETFs, MXI and DBN which together constitute about 1.8% of my total portfolio, but 8.6% of my basic materials holdings. I know it is redundant to hold both, but want to choose "wisely" between the two. I couldn't find the expense numbers for both of them. Which would you choose, and for what reasons?"
MXI is the iShares Global Materials and DBN is WisdomTree International Basic Materials. I own
MXI for a few clients for whom individual stocks in this sector are not ideal for whatever reason.
He notes it is redundant to hold both, well sort of. If the two funds, which are very similar, only total 1.8% then really the only redundancy is with the commission. If you sell one now would you then put that money into the other? So what's better, paying now or paying later when/if you sell. I think the important thing here is that the two added together don't constitute a reckless bet.
The 8.6% number is a little more eyeopening. As I read that I think he is saying his allocation to materials is in the mid-teens. The S&P 500 appears to be 3.17% in materials, the iShares DJ Total Market ETF (IYY) is 3.42%, the iSharesETF (IWB) is 4.68% (I think, it lists it as materials and processing) and the iShares Russell 1000 S&P 1500 (ISI) is 3.58%. Depending on the benchmark used, his number is high. Depending on what else is allocated to the sector this could be volatile and prone to some discomfort if the mega cycle ends abruptly.
As for his question of which I think is better; the seem to be interchangeable. The holdings are very similar to a point. MXI includes the US and DBN does not but the US weight is not huge. I think the more important differentiation is that the domestic materials ETFs don't have much commodities exposure.
The two BHP listings combine to be the largest holding in each fund. Anglo American (AAUK which is a client holding) is number two in MXI and number three in DBN. They each also have Rio Tinto, Bayer, BASF and Arcelor in their top tens.
Performance-wise the two started out tracking very closely but since DBN listed the outperformance looks to be five percentage points. An interesting point is that the entire outperformance appears to come from two periods; a couple of days in late March and maybe around May 1.
While the extra 5% certainly would have been nice I am not sure at this point if it is sustainable or not. I am not saying it isn't just that it is unclear to me.
The top-downist in me would note that the more important decision was made when he decided to buy either one. Since inception, regardless of which one anyone chose, holders are up about 50% while the S&P 500 is up 14%. A 2% allocation at inception has added 100 basis points to the entire portfolio which is not too shabby.
The picture is from Urquhart's Bay in New Zealand.
8 comments:
Models this week:
Timing Model = 4.5
100% long
Global Allocation of long positions
MSCI EAFE Index 40%
MCCI Emerging Markets Index 30%
Russell 3000 Index - U.S. 30%
Top US Sectors
U.S. Oil & Gas 4.0
U.S. Oil Equipment, Services & Distribution 4.0
U.S. Semiconductor 3.0
Precious Metals 3.0
U.S. Technology 2.5
Composite Internet 2.5
U.S. Basic Materials 2.5
U.S. Leisure Goods 2.5
Top Intl. ETFs
MSCI Germany Index Fund 3
S&P Latin America 40 Index Fund 3
MSCI Brazil Index Fund 3
FTSE/Xinhua China 25 Index Fund 3
MSCI South Korea Index Fund 3
MSCI Emerging Markets Index Fund 3
MSCI Mexico Index Fund 2
MSCI Malaysia Index Fund 2
MSCI Singapore Index Fund 2
MSCI Australia Index Fund 2
MSCI Canada Index Fund 2
Dear Roger,
After all the discussion about the niceties of asset allocation, I thought your readers might be interested in my mother-in-law's portfolio; for some years I have thought it wildly inappropriate for a woman in her nineties, but nobody asked my opinion, so I have kept quiet, which was a good thing as the portfolio has served her very well.
She has 33% of her assets in two stocks, CVX and XOM. 20% is in REITs, including 14% in SPG. About 5% is in utilities, 13.6% in corporate bonds, 5% in cash, 8% in an equity income CEF, and 8% in ETG, which I don't know much about--global dividend CEF, I think. The rest is in a floating rate CEF.
You can guess what a buy-and-hold type she is when I tell you she sometimes refers to the energy stocks as "Standard Oil". she was not involved in investment during her husband's lifetime, but inherited a portfolio of mostly DOW stocks and utilites when he died. She has an account with a well known brokerage, whose high commissions and paltry returns on cash give me the shivers. However I think her broker has really been a friend to her, and helped her get more diversification than she ever would have on her own.
Is it just luck that this sort of portfolio has gotten her by comfortably? She has been immune to the tech bubble and other train wrecks. I hope that if the market cahnges drastically, her broker has a plan. If it were up to me, I would sell the REITs, but then I would have sold them four years ago and missed quite a run. Now for tax reasons it would be better not to sell anything unless absolutely necessary.
This is something one often doesn't think about. If you are a successful buy-and-holder, in your last years you will be very reluctant to sell anything, because of large capital gains, and your vision of seeing the basis reset after your death, giving your heirs one of the few tax breaks available to the thrifty. Of course if it all goes down in value drastically, you might as well have sold.
Income from her investments plus social security cover about 94% of her expenditures, so she is drawing down her account slowly, but recently capital gains have made up the difference.
Incidentally one of your readers recently questionned spending money on "posh" retirement homes. From what I have seen with my parents and my husband's parents, a good retirement home can make all the difference in the world to quality of life in the 80's and 90's. My mother-in-law chose the retirement home she considered the best available, though it is not the most expensive one in our community. I am sure living there has prolonged her life and made it much more enjoyable, as well as taking many burdens off her family.
Linda
linda, probably me making the statement about expensive retirement homes. At the time thinking more of nursing homes that increase their level of care and some unhappy experiences. But, experiences vary widely and prudent investment planning can offer more choices which is a good thing. fwiw my mother has three stocks each worth 5-10 percent of her account: coke, exxon, and walmart. Her broker, also quite expensive, has been the one to try to get her to reduce her holdings and to spread them out into small cap growth stocks. Sometimes it is my mother who looks smart or stubborn, but I don't think any of those small cap stocks gave much of a ride.
Linda thanks for sharing this about your family.
High tax? Implies a re-learning going forward for others, maybe?
I don't think 15% is high byut i realize the obstacle one might face trying to convince someone else of that such that there may be no success but perhaps we can learn from the idea?
thanks again.
Roger, it's not so much that 15% is high as that 0 is so much lower.
Linda
fwiw my mother has three stocks each worth 5-10 percent of her account: coke, exxon, and walmart. Her broker, also quite expensive, has been the one to try to get her to reduce her holdings and to spread them out into small cap growth stocks. Sometimes it is my mother who looks smart or stubborn, but I don't think any of those small cap stocks gave much of a ride.
http://stockcharts.com/charts/performance/perf.html?KO,$RUT,XOM,WMT
FWIW, small-cap stocks (Russell 2000) has outperformed KO and WMT by an absolutely enormous margin over the past 8-9 years although XOM performed the best. That is an opportunity cost that cannot be recovered.
In my opinion, there is nothing "wrong" with having a sizable percentage dedicated to a small group of large-cap blue chips and then just LTBH with them. It certainly isn't going to result in any long-term damage (and will likely provide a decent return), but isn't likely to result in the best long-term returns either.
IMO, it makes more sense to make sure you are diversified across different asset classes and styles like small-cap or emerging markets, etc. and then rebalancing periodically to take advantage of those areas that have run big.
A good retirement buy and hold individual stock portfolio with decent diversification and yield are:
COP, PBR, UL, PFE, ABT, CB, WYE, PG, AIT, VFC, PKE, PVR. You could also hold HTE from Jan-late Aug.
Without HTE the approximate yield is about 2.45%.
It certainly beats holding 2-3 stocks.
You might also add AIB for banking when that trend turns around. It has a 4.4% yield. And I forgot to add MMM with a 2.3% yield.
That's 13-15 stocks. I would also add some good ETF's like DLS (5%)for small cap, and EEB and perhaps DEM at about 3% each.
I also very much like EWA, and for S. Korea, both KEF & EWY.
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