My 401(k) - Exchanging A Mutual Fund For ETFs, Part 1

Includes: AMLP, HDV, REM, SPY, XLU
by: J.D. Welch

Like many of you, I participate in my company's 401(k) program. Unlike a lot of you, I'm sure, I started doing so very late for my age. (I turned 50 this past January.) My reasons for not contributing to a 401(k) over the years, and especially since I joined my current employer seven years ago are varied, but in the end boil down to me rationalizing to myself that I couldn't afford to have the money come out of my net paycheck because I needed all the cash I could get to cover my annual expenses. Yes, I know -- very dumb.

However, I have repented, and enrolled in my company 401(k) plan with a 3% contribution this past December, which I increased to 5% this past April after my annual salary increase kicked in. My plan is to increase my contribution by 2% (or more) every April 1 until I'm at the maximum I can have withheld, including the extra allowed for those of us who are 50 and over. According to this plan, and if nothing horrific happens in the meantime, I will be contributing the maximum allowed by the IRS by the end of 2016, and every year thereafter until I retire or die, whichever comes first.

When I first enrolled in the plan, I had to pick somewhere to stash the cash that was being withheld. I am, in general, distrustful of mutual funds, based on past experiences with the money in my rollover IRA (there was some saving going on in my sordid past), and the standard buckets available within the plan didn't appeal to me. Fortunately, we are allowed a certain degree of self-management of our 401(k) funds by opting to participate in Fidelity's Brokerage Link feature. Within Brokerage Link, I have many more options available to me other than the standard "buckets" and age-based funds that are the default options, including a wider choice of mutual funds and Exchange Traded Funds (ETFs).

When I enrolled in my 401(k), I was very focused on the task of managing my meager IRA, which I'd taken control of last October, and decided that I had some time before I needed to pick the best options available to me through Brokerage Link. So, I screened for the best mutual fund, as rated by Morningstar that also had the best 10 year record, and chose the Yacktman Focused Fund (MUTF:YAFFX) for my contributions to start piling up in.

Eight months, twice as many paychecks and three bonuses have passed since I signed on to the plan, and I've learned a lot about investing, much (or all) of which I owe to the Contributors and Commenters here on Seeking Alpha. In that time, a fair amount of money (for me, at least) had accumulated in YAFFX, but the mutual fund itself had not performed very well, returning slightly over 1%. Granted, it had only been eight months, but in that time the S&P 500 (NYSEARCA:SPY) has returned over 11%, and besides, I always knew YAFFX would be a temporary parking lot for this retirement money.

The time has come to select better options for my 401(k) money until I reach 59-and-a-half years of age and can take in-service withdrawals from the plan into my IRA, where I will apply what I've learned about Dividend Growth Investing [DGI] from folks like fellow Seeking Alpha contributors David Van Knapp, Robert Allan Schwartz, Tim McAleenan and chowder, and direct my 401(k) funds into individual stocks designed to provide me with a reliable, inflation-resistant income stream in my retirement.

As I mentioned, I'm not fond of mutual funds in particular, and the ability to select and trade ETFs from my 401(k) was one of the reasons I signed up for Fidelity's Brokerage Link. There are literally thousands of ETFs to choose from with Fidelity, so which are the "right" ones for me?

For starters, I've been collecting ETF ideas from Seeking Alpha articles and, more importantly, the Comments sections beneath those articles, for months now. After researching the resulting list, and performing a screen on Fidelity for ETFs that might meet my general requirements of having a relatively high yield and low P/E, I've narrowed the list down to the following four:


Proposed ETF


Utilities Select Sector


Alerian MLP


iShares High Dividend Equity Fund


iShares FTSE NAREIT Mortgage Plus Capped Index Fund

Why just four? Well, there's only seven months of accumulated funds to work with so far, for one thing. For another, after looking at the companies held by these ETFs, I decided that they represented a strong mix of companies that I would otherwise, or already do, own myself. As a result, I feel that I am reasonably diversified for this portion of my retirement assets with these ETFs, at least for the next year or so. After enough money has accumulated into these four ETFs, I will consider whether adding a fifth and/or sixth would be prudent, but for the foreseeable future these four are a good representation of my investing goals.

Another reason for limiting my choices to four at the moment is that, unlike mutual funds of which I can purchase fractions, I have to buy whole shares of an ETF. I have estimated that at my current rate of contribution, and given Fidelity's $7.95 commission per trade, I will need to allow four paychecks (two months) of cash to accumulate in the cash portion of my Brokerage Link account before making a purchase, and even then I am likely to only buy shares of one or possibly two of these ETFs at that time.

Marco Polo

52 Week

XTF Rating

1 Year

3 Year





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Why these four ETFs, out of all of the thousands that I could choose from? For the answer to that question, and the inevitable question of whether or not I am merely "chasing yield," as some would call it, I will write subsequent articles to this one which will result in a series that, I hope, will enlighten and entertain. Look for Part 2 of this series to be published soon here on Seeking Alpha, wherein I will do a "deep dive" into the top holdings of each of these ETFs, and my reasons for selecting them as the destinations for my future 401(k) contributions.

Continue to part II

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AMLP, HDV, REM, XLU over the next 72 hours.

Additional disclosure: I am not a professional investment advisor or financial analyst; I’m just a guy who likes to crunch numbers and can make an Excel spreadsheet do pretty much whatever I want it to do. Additionally, I’m doing my best to manage my own portfolio. This article is in no way an endorsement of any of the stocks discussed in it, and as always, you need to do your own research and due diligence before you decide to trade any securities or other products.

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