My Analysis Of The CNBC.com ETF Portfolio

|
 |  Includes: AGG, AMJ, GLD, SDOG, SPY
by: Brad Kenagy

Yesterday, I read great article by Roger Nusbaum about an ETF portfolio that CNBC has created for 50 year olds with less than 20 years until retirement. They also have a portfolio for 70 year olds and 30 year olds but in this article, I will focus on analyzing the 50-year-old portfolio CNBC created. I have a couple goals that I want to accomplish when constructing my portfolio:

Goal 1: Diversification

Goal 2: Minimize Risk

Goal 3: Maximize Income

Goal 4: Minimize transaction costs, and portfolio maintenance

CNBC portfolio

Weighting

Cash

%

(NYSEARCA:GSY)

Guggenheim Enhanced Short Duration Bond

5

Equity

(NYSEARCA:SPY)

SPDR S&P 500

12.5

(NYSEARCA:SCHD)

Schwab U.S. Dividend Equity

5

(NYSEARCA:VO)

Vanguard Mid Cap

5

(NYSEARCA:FXH)

First Trust Health Care AlphaDEX

2.5

(NYSEARCA:VEU)

Vanguard FTSE All-World ex-US

12.5

(NYSEARCA:DEM)

WisdomTree Emerging Markets Equity Income

5

(NYSEARCA:ECON)

EGShares Emerging Markets Consumer Titans

2.5

(NYSEARCA:IDLV)

PowerShares S&P International Low Volatility

5

Bonds

(NYSEARCA:AGG)

iShares Core Total U.S. Bond Market

10

(NYSEARCA:LQD)

iShares iBoxx $ Investment Grade Corp Bond

5

(NYSEARCA:ELD)

WisdomTree Emerging Markets Local Debt

5

Opportunity

(NYSEARCA:BKLN)

PowerShares Senior Loan Portfolio

5

(NYSEARCA:GDX)

Market Vectors Gold Miners

5

(NASDAQ:VNQI)

Vanguard Global ex-US Real Estate

5

(NYSEARCA:HYLD)

Peritus High Yield

5

(NYSEARCA:UUP)

PowerShares DB US Dollar Index Bullish

5

Total

100

Click to enlarge

Analysis and Recommendations

The portfolio gives a decent framework to start from but it has a serious flaw: Redundancy. I will go through section by section to analyze and recommend an alternative to what the portfolio has.

CASH

I believe an allocation of 5% to GSY is a good choice for a "cash" ETF, and GSY has a current dividend yield of 1.22%.

US Equities

When looked at the equity portion of the portfolio I see four US equities ETFs: SPY, SCHD, FXH, and VO. I put each company into the correlation matrix tool on ETFScreen.com, and found the following all four funds are highly correlated to each other, which is in matrix below. The high correlations could be a serious problem for this portfolio.

FXH

SCHD

SPY

VO

FXH

1

SCHD

0.81

1

SPY

0.84

0.96

1

VO

0.85

0.93

0.96

1

Click to enlarge

Recommendations: Based on my goals I am removing all 4 of the US equities and replacing them with the following ETFs: the ALPS Sector Dividend Dogs ETF (NYSEARCA:SDOG), and the JPMorgan Alerian MLP Index ETN (NYSEARCA:AMJ). The reason why I selected SDOG was that it selects stocks with the highest dividend yield in each of the 10 major sectors. Then SDOG weighs each stock equally, so the fund is diversified by weighting, and by sector. In addition, SDOG has a dividend yield of 3.96%, which is higher than the SPY, or SCHD. The reason why I selected AMJ was that MLP's have shown to have lower volatility than the stock market as well as higher dividend yields, which AMJ has a current yield of 4.70%. So when looking at the correlations between SPY, SDOG and AMJ, I found that SPY is 92% correlated to SDOG so SDOG is an adequate replacement for SPY, and AMJ is 62% correlated to SDOG which is much lower than the 80%-90% correlation range of the other ETFs in the portfolio. For allocations, I would weight SDOG with an allocation of 20% and AMJ with an allocation of 5%.

Emerging Market Equities

In the portfolio there were 2 emerging market ETFs: DEM, and ECON. I used the correlation tool and found that DEM and ECON were 85% correlated which is quite high. I like both funds, but since they are highly correlated, I had to remove one of the two or replace both of them with another ETF.

Recommendation: I decided to replace both funds for a position in the iShares Emerging Markets Dividend Index ETF (NYSEARCA:DVYE), which selects the 100 largest emerging market companies that pay dividends. DVYE has a 3.82% dividend yield and for an allocation, I would allocate 10% to DVYE.

Developed Ex-US Equities

In the portfolio, 2 ETFs cover international equities, VEU, and IDLV. Right off the bat, I see another redundancy with VEU, because VEU holds all stocks that are ex-US it also owns stocks from emerging markets, in addition to developed market stocks. Looking at correlations, VEU is 86% correlated to DEM, and 78% correlated to ECON, so that is too high for correlation so I will be excluding VEU.

Recommendation: I will be removing VEU from the portfolio, but I will be keeping IDLV because it has lower volatility than VEU, and in addition, IDLV has favorable underlying holdings. The top countries in IDLV are Japan at 28%, Canada at 21%, the United Kingdom at 14%, and Australia at 11%, so together the top four countries represent 74% of the fund, and are stable I would say, with minimal exposure to Europe. Where as VEU like many other Ex-US ETFs have a sizeable weighting towards Europe. VEU has an allocation of 44% to Europe, which for me is too high, and is too much risk to take on. IDLV has a dividend yield of 2.19% and I would allocate 15% to IDLV.

Fixed Income

The fixed income section of the portfolio is probably the best section. I like having ELD because it owns emerging market bonds that are in the foreign currency, so it diversifies the portfolio so the portfolio is not dollar only.

Recommendation: With that said, I am going to make one switch. I will be swapping out LQD because the average maturity is just over 12 years, for the Vanguard Short-Term Corp Bond Index ETF (NASDAQ:VCSH), which has a average maturity of 3.1 years. VCSH currently has a dividend yield of 1.19% and I would allocate 10% to VCSH. In addition, I will be keeping AGG, which has a dividend yield of 2.44% at a 10% allocation, as well as the 10% allocation to ELD, which has a dividend yield of 3.81%.

Opportunity

For the opportunity section, I once again see more redundancy with BKLN and HYLD both being classified as high yield, so one of the two has to go. I do not see any reason to include UUP except for a hedge against a down market, since most of the portfolio is mostly in dollars already. Gold miners have horrible performers, and have always been tough investing in. I actually like the pick of VNQI because I believe more and more people in around the world are going to be moving from rural areas to urban areas and that will bode well for real estate.

Recommendations: For the first selection of the opportunity section, I will be keeping VNQI, which has a dividend yield of 5.17% and I will allocate 5% to it. I will be replacing GDX because of its poor performance, with a SPDR Gold Trust ETF (NYSEARCA:GLD) and allocate 5% to it. I chose to include HYLD because it has a 8.18% dividend yield and has a average duration of 3.15 years where BKLN has a lower yield at 4.79%, and has a longer duration of 5.15, so to reduce interest rate risk I chose to include HYLD at a 5% allocation.

My Final Portfolio

The first table below shows my portfolio with my recommended selections, weights and yield. Then the second table below shows the correlations of each fund in my portfolio to each other.

Asset Class

Symbol

Description

Weight

Yield

Weight*Yield

CASH

GSY

Guggenheim Enhanced Short Dur Bond ETF

5%

1.22%

0.061%

Equity

SDOG

ALPS Sector Dividend Dogs ETF

20%

3.96%

0.792%

Equity

AMJ

JPMorgan Alerian MLP Index ETN

5%

4.70%

0.235%

Equity

DVYE

iShares Emerging Markets Dividend

10%

3.82%

0.382%

Equity

IDLV

PowerShares S&P Intl Dev Low Volatility

15%

2.19%

0.329%

Bonds

AGG

iShares Core Total US Bond Market ETF

10%

2.44%

0.244%

Bonds

VCSH

Vanguard Short-Term Corp Bd Idx ETF

10%

1.19%

0.119%

Bonds

ELD

WisdomTree Emerging Markets Local Debt

10%

3.81%

0.381%

Opportunity

VNQI

Vanguard Global ex-US Real Estate ETF

5%

5.17%

0.259%

Opportunity

GLD

SPDR Gold Shares

5%

0%

0.000%

Opportunity

HYLD

Peritus High Yield ETF

5%

8.18%

0.409%

Portfolio Yield

3.210%

Click to enlarge

Portfolio Correlation Matrix

AGG

AMJ

DVYE

ELD

GLD

GSY

HYLD

IDLV

SDOG

VCSH

VNQI

AGG

1

AMJ

-0.27

1

DVYE

-0.31

0.33

1

ELD

-0.19

0.27

0.59

1

GLD

0.06

0.1

0.26

0.32

1

GSY

0.17

0.14

-0.1

-0.14

-0.12

1

HYLD

-0.17

0.34

0.3

0.24

0.04

0.14

1

IDLV

-0.25

0.49

0.51

0.47

0.16

0.04

0.34

1

SDOG

-0.47

0.62

0.58

0.49

0.18

-0.01

0.4

0.7

1

VCSH

0.35

-0.05

-0.13

0.08

-0.01

0.04

0.04

-0.04

-0.1

1

VNQI

-0.27

0.44

0.69

0.55

0.15

-0.11

0.3

0.71

0.65

-0.08

1

Click to enlarge

Closing Thoughts/Observations

My portfolio I believe accomplishes all four of my goals I set at the beginning of my article, it has significantly better diversification between each ETF, and as the correlation matrix above shows, no two funds are more than 71% correlated, which is accomplishes my diversification goal. I accomplished my second goal of minimizing risk by leaning more towards ETFs with lower volatility, higher dividend yields, and reducing interest rate risk by choosing fixed income ETFs with shorter durations. I maximized income by selecting ETFs with above average yields, and the portfolio having composite yield of 3.21% is very good considering a 10-year treasury is currently yielding 1.79%. Finally, I accomplished my goal of reducing transaction costs by reducing the number of ETFs in the portfolio, and a portfolio of 11 ETFs is much easier to manage than a portfolio of 17 ETFs. I hope someone from CNBC reads this and sees the improvements I have made to the portfolio they created, which I believe is a much better portfolio then the one they created. If they wanted help creating portfolios of ETF, I would be open to helping them.

Disclaimer

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.