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One of the most common mistakes investors make is going with the known rather than the best...
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Monday, February 11, 9:07 AM ETOne of the most common mistakes investors make is going with the known rather than the best ETFs, says Matt Hougan, speaking at Index Universe's Inside ETFs conference. One example is using FXI for China exposure (discussed here, try CAF instead). Another: Buying XLF for financials avoids small caps. Look to IYF for broader exposure.
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This news story has 5 comments:
Most cap-weighted ETFs which contain both small and large caps behave just like large cap ETFs, because the large cap stocks dominate their index. IYF's top 10 holdings, for example, account for 39.4% of the entire fund. Not surprisingly, if you compare IYF and XLF on a chart, they're almost identical.
Same goes for SPY (S&P 500) and VTI (Total US Market).
This doesn't include dividends. I'm guessing they've been quite similar over that time, but it could be enough to have created the difference.
http://bit.ly/VPSSlE
IYF : $4.976
XLF : $1.650
comparing yields is tricky; choosing the Jan 2, 2008 opening price for each gives the 5-year dividends as a percent:
IYF : 5.28% (4.976 / 94.31)
XLF : 5.67% (1.65 / 29.08)
10-year dividends:
Dividends paid for calendar years 2003-2012 total:
IYF : $12.726
XLF : $4.926
the Jan 2, 2003 opening price for each gives the 10-year dividends as a percent:
IYF : 18.44% (12.726 / $69.00)
XLF : 22.34% (4.926 / $22.05)
Put another way, the 5- and 10-year total dividends on a $10,000 investment:
IYF : $527.62 : $1,844.35
XLF : $567.40 : $2,234.01
Since I sell puts for additional income, XLF is a better choice for me (more liquidity in the options).
I guess in the short term the small caps are drowned out by the large caps, but over longer periods -- as you point out -- they produce a performance difference.
IYF : $6,483 : $8,895
XLF : $5,664 : $7,477
Total 5- and 10-year performance (price + dividends) of $10,000 investment:
IYF : $7,010.62 : $10,739.35
XLF : $6,231.40 : $9,711.01
Take-away: as Stephen Alpher noted above, IYF has outperformed XLF on a 5- and 10-year basis, and the slightly higher dividends paid out by XLF don't account for the difference.