High-Yield ETF Portfolio

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 |  Includes: EMB, JNK, PBP, PCY, PGF
by: Brad Kenagy

For this article I will be writing about a high yield portfolio, in response to a comment I had on a previous article about simple portfolio building. For this portfolio I will be using a new free ETF screener that I recently discovered on Fidelity's website here. For the portfolio I have a couple criteria/goals for the portfolio, and they are:

  1. If there is more than one fund that meets the screener criteria choose the one with the Highest Dividend yield.
  2. Reduce the volatility of the portfolio by weighting the least volatile funds higher than more volatile funds. I used the 12 month average volatility over the last 36 months. [Volatility data is from ETFreplay.com]
  3. Any fund chosen must have at least 3 years of return data.
  4. For the makeup of the portfolio I wanted US Stocks, US Bonds, Emerging Markets Stocks, Emerging Markets Bonds, and one miscellaneous category ETF.

ETF Screener Selection Criteria:

  1. Exclude Leveraged and Inverse ETF's.
  2. ETF type: ETF's only, no ETN's.
  3. Net Assets of greater than 100 Million.
  4. Inception Date: Set to before 3/14/2009.
  5. Dividend Yield greater than 4.00%.
  6. Geography Objective: Set to Domestic to find US Stocks and US bonds, and set to Emerging Markets for Emerging markets stocks and bonds.
  7. Asset Class: Set to Equity, for equity ETF selections, set to fixed income for bond ETF selections and finally set to Hybrid for the miscellaneous ETF selection.

Fund Selection Process

US Equity ETF:

For this ETF I used the above screener criteria and found that there was two ETF's that met the screen criteria: The PowerShares S&P 500 BuyWrite (PBP), and the Utilities Select Sector SPDR (XLU). So using my criteria I chose to include PBP in the portfolio because it had a higher dividend yield than XLU.

US Bond ETF:

For this ETF I used the above screener criteria and found that there was seven ETF's that met the screen criteria and the one with the highest dividend yield was the SPDR Barclays Capital High Yield Bond (JNK), so I included it in the portfolio.

Emerging Markets Equity ETF:

For this ETF I used the above screener criteria and found that there was only one ETF that met the screen criteria, and it was the WisdomTree Emerging Markets Equity Inc (DEM), so I included it in the portfolio.

Emerging Markets Bond ETF:

For this ETF I used the above screener criteria and found that there were two ETF's that met the screen criteria: the PowerShares Emerging Mkts Sovereign Debt (PCY), and the iShares JPMorgan USD Emerg Markets Bond (EMB). So I the one with the highest dividend yield was PCY so I included it in the portfolio.

Miscellaneous ETF:

For this ETF I used the above screener criteria with the asset class set to hybrid, and found that three preferred stock ETFs met the screen criteria. Out of those three ETFs the one with the highest dividend yield was the PowerShares Financial Preferred (PGF), so I included it in the portfolio.

Portfolio Funds Weighted by Volatility

Description

Symbol

Weight

Volatility

PowerShares Emerging Markets Sovereign Debt

PCY

30%

6.60%

SPDR Barclays Capital High Yield Bond

JNK

25%

12.60%

PowerShares S&P 500 BuyWrite

PBP

20%

16.80%

PowerShares Financial Preferred

PGF

15%

19.30%

WisdomTree Emerging Markets Equity Inc

DEM

10%

25.70%

Click to enlarge

Portfolio Dividend Yield

Below is a table showing the calculations I did to come up with the overall dividend yield for the above portfolio. To calculate the portfolio dividend yield I multiplied the weight by the yield and added the total up, thus giving me the overall portfolio dividend yield. The dividend yield data below in the table is from the Fidelity screener.

Description

Symbol

Weight

Dividend Yield

Weight*Yield

PowerShares Emerging Markets Sovereign Debt

PCY

30%

5.23%

1.57%

SPDR Barclays Capital High Yield Bond

JNK

25%

7.41%

1.85%

PowerShares S&P 500 BuyWrite

PBP

20%

10.36%

2.07%

PowerShares Financial Preferred

PGF

15%

6.81%

1.02%

WisdomTree Emerging Markets Equity Inc

DEM

10%

4.05%

0.41%

Overall Portfolio Yield

6.92%

Click to enlarge

Returns & Data

[Data from ETFreplay.com]

I chose to compare the above portfolio to the iShares S&P Moderate Allocation (AOM), because after looking through the allocations of the four Ishares allocation ETF's, AOM had the closest asset allocation to the above portfolio with AOM having roughly 58% in bond ETF's, and 42% in equity ETF's, where as the above portfolio has 55% in bonds, 30% in equities, and PGF with 15% in a hybrid of bond and equity.

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Correlations

Correlation Data from ETFscreen.com.

DEM

JNK

PBP

PCY

PGF

DEM

1

JNK

0.77

1

PBP

0.77

0.73

1

PCY

0.39

0.43

0.3

1

PGF

0.72

0.64

0.65

0.32

1

Click to enlarge

Portfolio Challenges

The biggest challenge for this portfolio is the volatility that comes with the higher yielding ETFs in the portfolio. For someone with a higher risk tolerance that would be fine, but that would be a problem for someone who wanted yield but was not willing to take on extra risk to achieve that higher yield.

Closing thoughts

Overall the portfolio greatly outperformed AOM by almost a 2-1 margin over time, and did so with slightly less volatility than AOM. What I think made the biggest difference in the outperformance of the portfolio was the not the volatility since both portfolio's were close to each other, so the yield had to have an effect on the returns because AOM yields 2.14% which is less than one third of the yield of the above portfolio. The portfolio met all the criteria I set at the beginning of the article, and also the goal of creating a high yielding income portfolio.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer