Why It's Hard To Get Yield Just Using ETFs

Includes: SCHB, SCHD, SPY
by: Roger Nusbaum

As a followup to Wednesday post about all-ETF portfolios from CNBC.com I found this article at Seeking Alpha titled Blending Alpha & Beta: Building A Mini Endowment. The image below was the model put forth for illustrative purposes only. While the author said this is not the totality of the portfolio he manages for clients, I did get the impression he only uses funds (mostly ETPs).

I'm not sure about the endowment qualities of the portfolio, but it covers a lot of ground and the article had a lot of great detail on what seemed like every aspect of the portfolio. One statistic he mentioned was that the above yields 2.5%, which he said was modest and the portfolio was not designed for retirement income.

This highlights an issue I made a long time ago, which is that it is very difficult to get much in the way of yield just using ETFs. The good news is that it is now a little easier to get some yield just using ETFs. Dividend-oriented ETFs have proliferated as have other specialty funds that offer up some yield. It does require some work to find these funds and then get familiar with what is under the hood.

The SCHD in the table above is included because at Schwab there is no commission to trade it (there might be other reasons but they weren't mentioned) but it only yields 2.7%. In the realm of comparing broad-based, dividend-oriented funds, a simple cost benefit analysis will tell you whether you are better off paying the eight bucks for a higher yielding fund.

Where it was not clear with the CNBC portfolios, it is clear here that this is intended for someone willing to spend some time on the portfolio.

One detail that related to both the CNBC portfolio and this one is the use of SCHD and a broad based large cap domestic ETF, in this case, SCHB and with the CNBC portfolio, SPY. My first thought with the CNBC portfolio was that the correlation between SCHD and SPY must be very tight. But when I compared the two on Yahoo Finance, it appeared as though SCHD outperformed by a mile, so I didn't mention it. But then a reader left a comment on the Seeking Alpha version, noting the correlation at 96%. This made no sense based on the Yahoo chart, so after reading his comment, I plugged them into Google Finance and the reader's stat made sense.

One other point to make on this topic, one that I make often, is that it is ok to use some individual stocks as part of the mix. Again, the context with the portfolio as offered is someone spending time managing it, so individual names would not be out of the question. (I realize some people are better off with no individual stocks.)

A combo of broad-based funds and dividend-oriented funds could be assembled today in such a way that it is still broad-based, but offers a superior yield than could have been obtained five years ago just using broad-based funds. For the person willing to do the work necessary to put 15-20% into individual stocks could of course increase their yield substantially.