As we enter this holiday season, I’m feeling generous. You see, one reader’s feedback struck me as the perfect opportunity to give you more specific recommendations for your portfolio.
So today, I’ll talk about some of my favorite picks for those who have trouble choosing just one company.
So, for all you readers out there who are looking to invest in funds that encompass more than one stock pick, read on for a smorgasbord of options to choose from.
And if you have any questions, I’d love to hear from you. Remember: While we can’t give personalized investment advice, my team and I read every piece of feedback that comes in. Please write to us here. And I’ll address them in next week’s mailbag…
Now let’s get started…
Really appreciate you talking about the farming exchange-traded funds (ETFs). I’m partially comfortable with individual real estate investment trusts (REITs). But in general, I like your SWAN approach. Which is why I don’t very much like taking on the risk of individual companies in our portfolio. So I vote for more coverage of ETFs. – Joan F.
Brad’s response: Thank you for your feedback, Joan!
I’ve had too many sleepless nights over the years to ever want to trade my SWAN (sleep well at night) approach to investing.
To your point, ETFs are attractive because they encompass more than one company or one REIT, for that matter. In the U.S. alone, ETFs are valued at around $3 trillion, and the sheer convenience makes the sector extremely appealing.
The benefits to owning an ETF are obvious… You get a diversified basket of companies. But remember, you also get the good, the bad, and the ugly.
And with only a limited research team (if any) to provide a filter, if you simply want to buy an ETF and be done with it, you’re getting that basket of the good, the bad, and in some cases, the ugly.
You must also consider fees, and whether the ETF is active or passive.
Individual stocks, meanwhile, can be great if you choose the right ones, but they have their own risks.
When selecting which route – or combination of routes – to choose, I think it all comes down to what type of investor you are.
Types of Investors
During the last 12 years, I learned there are two types of investors – do it yourself investors (DIY) and “do it for you” investors.
Of course, you’re clearly a DIY investor, because you subscribed to my newsletter and you’re selecting your own stocks for your investment portfolio.
However, due in large part to the rapid growth in technology, more and more investors are becoming ”do it for you” investors, recognizing they don’t have the time or expertise to build their own basket of stocks.
Today, I will share a great option for “do it for you” investors as well as a portion of a portfolio for DIY investors who are interested in ETFs focused on REITs.
A Do-It-For-You ETF
The case for ETFs and index funds as an investment is strong. This is because, over the long-term, average investors tend to be pretty bad at picking stocks.
There’s also the hybrid approach, where some folks do their research, build their own portfolios, and also invest in ETFs. I’ll talk about some of those options below.
But if you want just one ETF, I would recommend the Schwab U.S. Dividend Equity ETF (SCHD). It tracks the total return of the Dow Jones U.S. Dividend 100 Index before fees and expenses.
Here’s how it selects those 100 stocks… As of September 30, 2022, the Dow Jones U.S. Broad Market Index contained 2,524 stocks, excluding REITs.
The Dow Jones U.S. Dividend 100 Index applies an initial filter to bring this extensive list of stocks to a manageable number of several hundred. The three initial screeners are:
Minimum of 10 consecutive years of dividend payments.
Minimum float-adjusted market capitalization of $500 million.
Minimum three-month average daily trading volume of $2 million.
The primary screening criteria apply safety and quality metrics, so the companies in SCHD have dependable dividends, sufficient size, and good liquidity. Next, the stocks are ranked on four fundamentals.
Free cash flow to total debt, defined as annual net cash flow from operating activities divided by total debt. Companies with no debt are ranked first.
Return on equity, defined as annual net income divided by total shareholders’ equity.
Estimated dividend yield.
And five-year dividend growth rate, defined as the dividend rate for the prior year divided by the average dividend rate for the last five years, minus one.
So SCHD dives deeper into quality, focusing on strong balance sheets, good profitability, and strong – and growing – dividend yields.
REIT ETF Options
In terms of REIT ETFs, at Wide Moat Research, we track around 20 of them. And the largest is the Vanguard Real Estate Index Fund ETF Shares (VNQ), a titan among REIT ETFs.
It has more than 11 times the assets under management (AUM) of its nearest competitor, Schwab U.S. REIT ETF (SCHH) with around $5.5 billion worth.
Then there are the so-called “sharpshooters” REIT ETFs. Those target more specific segments of the REIT market. These are names like VanEck Vectors Mortgage REIT Income ETF (MORT), NETLease Corporate Real Estate ETF (NETL), and Pacer Data & Infrastructure ETF (SRVR).
I included a chart below that illustrates how the larger REIT ETFs – like VNQ and SCHH – have much lower fees. Alternatively, the smaller (sharpshooters) charge more for their so-called “specialization.”
These are some things to consider when looking at ETF options. When you weigh the pros and cons, you can decide which path is right for you.
Personally, I’m a fan of having some select ETFs in your overall portfolio. They’re just another way for investors to sleep well at night! And I look forward to bringing you more research on them in the future.
Happy SWAN investing,
Editor, Intelligent Income Daily
P.S. If you’re interested in more individual stock recommendations, check out the list I’ve put together at my Intelligent Income Investor service here.