Building a Sector Portfolio by Using All the Tools Available

by: Roger Nusbaum

Long time readers will know about some of the building blocks I believe in for portfolio construction, which include a mix of different tools, a higher dividend than the S&P 500 (most of the time), building a portfolio at the sector level and a lot of foreign exposure. Every now and then I like to build a sample portfolio on the blog that might promote thinking about the task a little differently.

(As an FYI, I don't own any of the following personally or for clients. For each sector I picked one ETF and one stock. As one of the drawbacks with ETFs is often lower dividend yields, I'll try to make up for that with some of the stock selections.)


WisdomTree International Real Estate Fund (NYSEARCA:DRW): In many circles, real estate is considered part of the financial sector. This fund went down less than the Financial Sector SPDR (NYSEARCA:XLF) and is a little closer to its pre-crisis level ... but still has a long way to go. It paid out a massive dividend at the end of 2010 that is not likely repeatable. The info page pegs the 30-day SEC yield at a more realistic 3.45%. I personally think RE fundamentals stink, but if that turns out to be wrong, this fund should capture the effect.

Banco de Chile (NYSE:BCH): We own another Chilean bank. I've spelled out the Chile story many times before, and the big banks seem to be good proxies for the story. The trailing yield is 4.6% and the stock is way above its pre-crisis high.


iShares S&P Global Clean Energy Index Fund (NASDAQ:ICLN): This might be a stretch, as only 57% could be considered technology, but I think the objective combined with the weighting would at least elevate this to being a maybe for technology. There is going to be progress on this front, that is certain. The variable will be how much progress -- but if there is meaningful progress, then this fund should benefit.

Nvidia (NASDAQ:NVDA): Barron's just did a write-up on this over the weekend, so this would be an easy one to at least learn the story about. This one has no dividend, but there are several chip stocks with large dividends, including Intel (NASDAQ:INTC), Maxim Integrated Products (NASDAQ:MXIM) and Microchip Technology (NASDAQ:MCHP).

Health Care

PowerShares Dynamic Healthcare Sector Portfolio (NASDAQ:PTH): This fund avoids large exposure to the usual domestic suspects, and since its inception in 2006 it has meaningfully outperformed the Healthcare Sector SPDR (NYSEARCA:XLV), which is very heavy in the usual domestic suspects. PTH does give prominent weightings to a couple of insurers, which could be problematic.

Abbott Labs (NYSE:ABT): I got taken to task just a little on this one recently. It yields 3.76% and has a long track record for raising dividends.


Global X Uranium ETF (NYSEARCA:URA): Take the time to learn about what the demand for uranium is likely to be over the next 10 years. For 2011, it is not clear to me that it will be a world beater unless the price of oil goes up a lot -- which would probably cause URA to also go up a lot. One important point is that this fund will be very volatile.

Petrobras Preferred (PBRA): This is probably a contrarian name because of ongoing political threats and a recent dilution. The preferred and the common correlate very closely, but the preferred yields a little more at 3.45% than the common.


First Trust ISE Water Index Fund (NYSEARCA:FIW): There are several water ETFs; often these funds are heaviest in industrial stocks, as is the case here at 58%. I've been writing about water for years now, and think it will prove to be the most important resource story of the new decade.

Siemens (SI): This is, obviously, a German company, which yields 2.87%. While I want no part of big Western Europe, Germany is probably the healthiest of the bunch. SI has correlated closely to iShares Germany (NYSEARCA:EWG) for a long time, but has pulled away meaningfully over the last two years.


EG Shares Emerging Market Consumer ETF (NYSEARCA:ECON): I'm blending together discretionary and staples, as this fund targets about a 50/50 mix between the two. It came out of the blocks quickly and has tapered off in the last month. I think the consumer story on the ground in most of these countries is investable, and this fund obviously does that.

Lorillard (NYSE:LO): Tobacco is usually a good way to add yield to a portfolio. LO yields 5.99% and had performed inline with some of the other tobacco stocks.

McDonald's (NYSE:MCD): This is kind of an easy way out for being so familiar, but it yields 3.45% and is down some from its high.


Emerging Markets Telecom & Infrastructure Fund (ETF): This is actually a closed-end fund that I have mentioned before. The word "infrastructure" was recently added to the name of the fund; confusingly, the symbol is ETF, but that is not the fund's fault as it predates the exchange-traded boom by many years. The trailing yield is 2.8%, it trades at a discount to NAV, and over the last couple of years has outperformed a couple of the bigger telecom ETFs. Despite the word "infrastructure" added to the name, telecom stocks still dominate the most recent reported holdings.

As far as individual stocks in this space, according to BNY Mellon there are 37 NYSE listed stocks in this sector (the total of fixed line and mobile) and while Portugal Telecom (NYSE:PT) might not be a great hold, there might be a compelling case for some of the others on that list. For a domestic stock, there are of course several to choose from, including AT&T (NYSE:T), which yields 5.99%.


First Trust ISE Global Platinum Index Fund (NASDAQ:PLTM): The fund is heavy in South Africa and Canada, with the largest holding being from Russia. There are a ton of specialty ETFs in this sector covering a lot of ground -- from metals of all sorts to agriculture to chemicals, and even China. Most of these are quite volatile.

Cemex (NYSE:CX): If there is ever a cement ETF, this stock will probably be featured prominently. It has done poorly for quite a while now, and although I would prefer one of the cement stocks with a five-letter ticker I'm avoiding those for this post ... so I guess that this is just a reminder that cement can be part of this sector, and some of the stocks have done quite well.


PowerShares Small Cap Utilities Portfolio (XLUS): I'm putting this in the mix as a reminder that PowerShares has a suite of small cap sector funds. XLUS has soundly outperformed XLU, the large-cap fund from SPDR, due in part to small caps having generally outperformed large caps. In eyeballing the holdings, XLUS appears to have a much different volatility characteristic than the large cap utilities funds that you may be more familiar with.

For a stock here, someone willing to delve into the pinksheets for a foreign name could find all sorts of toll roads and airports to collect some yield with low volatility. Again, the BNY Mellon site can be a good place to go for research ideas; there are 21 NYSE ADRs and the U.S. large cap utilities, or to go a little more specialized there are also water utilities.

Hopefully some of the above is new to you; to repeat, we don't own any of the names mentioned. There are all sorts of market segments that are easily accessible; again, this post did not get into the difficult-to-access spaces to build a diversified portfolio. A mix that includes ETFs and individual stocks allows for managing all sorts of portfolio effects, including single stock risk -- which I why I believe in using both.