There has recently been a vigorous debate in the comment section of one of David Van Knapp's (DVK) articles wherein one commentor named User 427801 has been insisting that simply buying and holding the ETF FSEMX, which he describes as being a "mid/small cap extended market fund", would best a Dividend Growth (NYSE:DG) based ETF.
DVK's original article reviewed a few self proclaimed Dividend Growth ETFs and pointed out how they all produced much poorer returns than a well constructed portfolio of select DG stocks, which is an approach that a great many regular readers of the SA Income section follow.
Several readers, myself included, attempted to persuade User 427801 that we believe a well built portfolio of DG stocks will outperform his ETF over an extended period, which he continues to deny. I gave an example of a small 10 stock portfolio which outperformed FSEMX since 2000 and was again denied for various reasons, chief among them the time frame of the comparison and a lack of stocks that would have been held before the 2008 market meltdown but performed poorly afterward.
Since User 427801 didn't like my initial try I decided to repeat the exercise with a larger 30 DG stock portfolio which included some of the "loser" DG stocks that got beaten up in the 2008 market meltdown (financials, etc.) and over the entire lifetime of the FSEMX ETF (from 2/1/1988 to 7/31/2013). Here are my results:
My 30 Stock portfolio consists of the following initially equal weighted holdings:
ABT, AFL, COP, CVX, D, DRI, GIS, HRS, JNJ, KMB, KO, LMT, MCD, MMM, MO, NSC, OHI, PEP, PG, SO, SYY, T, VZ, WAG, XOM, AIG, BP, CTL, JPM, WFC
The last five holdings (bolded and underlined) are my "stinker" stocks representing holdings that at one time may have been a good DG stock, but which fell on hard times and provided poorer performance afterward. Normally a DG investor would trade these stocks out of a portfolio soon after they stumbled and replace them with a better DG stock, but I have left them in for the duration just to make it a fully "Buy and Hold" exercise. Those 'stumbling' stocks represent 16.67% of the initial investment and are held more than 40% of the entire duration after they 'stumbled'.
Notice that all of the DG stocks are steady performers and not the latest high octane growth stock. So that "mid/small cap extended market fund" should clean up, right?
Not so fast . . .
Here are the final results:
Holding period 2/1/1998 to 7/31/2013, Initial investment of $10,000 per stock and $300,000 in FSEMX, all dividends DRIP'ed.
FSEMX: Final value of $884,980. Total Return of 7.7% CAGR.
30 DG Stocks: Final value of $1,214,900. Total Return of 10.0% CAGR.
Anyone wishing to perform their own comparison, or double-checking mine, can use the same website I used to try out their own choices of stocks, funds, or ETFs:
Comments are welcome. There's always something to learn from an exercise like this. I was actually surprised that putting 1/6-th of the initial portfolio into stocks that got whacked in the 2008 meltdown didn't drag the whole group down more (AIG lost over 92% of its initial value). Diversification certainly helps in that regard even when the poor performers continue to be held during the last 40+% of the time interval.
FWIW, 22 of the 30 stocks individually outperformed FSEMX over its lifetime. I guess there's something loveable about those big, boring DG stocks after all.