Create Your Own Mini ETFs

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Includes: BMO, BNS, CM, FCX, HCP, NHI, NNN, O, RIO, RY, SCCO, STAG, TCK, TD, TRQ
by: Bob Johnson

This article is about diversification of equity assets outside of core investments. Presented is an approach, which allows the investor to focus on sectors, industries or stocks from a specific country or region. I call this approach “The Creation of Your Own Mini ETFs."

It involves making small investments in several related companies, which are leaders in a given field, rather than making a larger investment in one company. The advantage of this approach is that it gives you wide and diversified positions within an industry, such as what you might get in an index ETF. However, you are not locked into an index generated list companies, which might or might not fit your investment strategy. You select the individual firms. In addition, you can focus on very specific areas for which there is no ETF.

Copper Miners

A copper miner ETF exists. I will use this as an example of what the index ETF looks like and compare it to what your own mini-ETF could look like. Global Funds Copper Miners (NYSEARCA:COPX) consists of 34 stocks, the top 10 are:

Grupo Mexico Sab De Cv

Southern Copper Corporation

Antofagasta,

Oz Minerals Ltd,

Inmet Mining Corporation,

Hudbay Minerals,

KGHM Polska Miedz,

Freeport-McMoRan Copper,

Kazakhmys Plc,

Quadra FNX Mining Limited

GMEXICOB.MX

SCCO

ANTO:L

OXFLY

IMN:TO

(NYSE:HBM)

KGHPF.PK

(NYSE:FCX)

KAZ.L

QUX:TO

6.14%

6.03%

5.85%

5.49%

5.32%

5.19%

5.02%

4.94%

4.71%

4.66%

Click to enlarge

The above companies are primarily in the business of mining and refining copper. The fund’s management fee is 0.65%. COPX has a yield of 0.66%.

Copper Miner – Mini ETF

Name

Sym

Yield

Trade

52-wk Range

P/E

PEG

Market Cap

BHP Billiton

BBL

3.80%

57.15

49.90 - 86.96

6.69

0.78

152B

Rio

Tinto

RIO

2.30%

47.40

40.50 - 76.67

5.81

0.63

91B

Freeport-McMoRan

FCX

2.70%

36.99

28.85 - 61.35

6.46

1.22

35B

Southern Copper

SCCO

9.60%

29.46

22.58 - 50.35

10.90

0.80

24B

Teck Resources

TCK

2.30%

33.86

25.76 - 65.37

8.73

2.86

20B

Click to enlarge

Let me list how they are different from the holdings of the commercial ETF. They all trade on the NYSE. They are established companies with market caps of over 20B. The top four are among the top 10 copper producing companies in the world. BHP, RIO and TCK are categorized as diversified miners. The average dividend for the group is over 3.50%, compared to 0.61% for the global fund.

I own all but TCK. These stocks are up from their lows of early October but still in bargain territory. I believe that these miners are a terrific long-term opportunity, and one that pays a nice dividend now. Mining is an industry that sells products which are traded commodities. This is probably part of the reason for their volatility.

The next mini ETF I want to show you consists of the big five Canadian banks. These banks, with their numerous branches, account for over 80% of Canadian banking. We will create our virtual mini ETF to fill an investment need, exposure to the financial sector with less risk than what other banks offer. Canadian Banking is especially appealing because Canadian Banks are the soundest in the world. Not only that, they also pay handsome dividends. I have positions in Royal Bank of Canada (NYSE:RY), Bank of Nova Scotia (NYSE:BNS) and Bank of Montreal, and I am watching TD Bank.

Canadian Bank – Mini ETF

Name

Sym

Yield

Trade

52-wk Range

P/E

PEG

Market Cap

Royal Bank Of Canada

RY

4.50%

47.05

41.40 - 63.59

15.28

0.87

67B

Toronto Dominion Bank

TD

3.80%

70.01

64.56 - 89.79

11.35

0.84

63B

Bank Of Nova Scotia

BNS

4.30%

47.44

45.79 - 62.33

10.67

1.04

51B

Bank Of Montreal

BMO

5.10%

52.78

51.83 - 66.64

10.65

1.16

33B

Canadian Imp Bank

CM

5.00%

69.64

64.92 - 88.76

9.90

1.17

27B

Click to enlarge

This final example is a small collection of REITs. There are a number of good REIT ETFs and mutual funds. However, if you are a do it yourself investor you might want to put together a REIT mini ETF. It might look like this, or it might look entirely different.

Real Estate Investment Trust– Mini ETF

Name

Sym

Yield

Trade

52-wk Range

P/E

PEG

Market Cap

Realty Income Corp

O

5.20%

34.58

27.93 - 36.35

32.20

4.13

4.6B

National Retail Properties

NNN

6.20%

25.96

22.69 - 27.61

30.90

3.46

2.4B

HCP, Inc. Common

HCP

5.00%

39.01

28.76 - 40.87

16.75

1.95

15.9B

National Health

Investors

NHI

6.00%

44.21

37.90 - 49.55

15.37

2.53

1.2B

Stag

Industrial

STAG

9.50%

11.15

9.55 - 12.98

N/A

3.26

177.3M

Click to enlarge

Transaction costs were a concern initially, in large part because I began my investment career in a different era. You used to pay a healthy commission to purchase equities, and there was an extra tariff if you purchased an “odd lot” of fewer than 100 shares. My experience was that the small trade went through on an uptick. Now I buy and sell online at $7.00 a trade. This means if I only invest $1,000 my expense is 0.70%, not much different from the annual fee on an ETF. If my trade is for $5,000 that means the fee is only 0.14% plus a few pennies tax. I see many great things about investing like this outside my core dividend growth holdings. If there is a downside, it is in owning as many individual stocks as one could. However, I have these set up as individual portfolios and can quickly glance and see if any group shows an anomaly. I do not feel that I need to read the news feeds on these small positions, as my risk is truly low.

I suspect that some will find this a great strategy and others will not. I wish you good luck whatever you choose to do.

Disclosure: I am long RY, BNS, BMO, IVN, SCCO, FCX, BBL, RIO.