Brian Dightman's  Instablog

 

As a separate account manager, I limit the number of holdings and minimum investment size I include in my strategies. For practical reasons I want to limit the number of investments I have to track at any given time and for economic reasons, trading costs impact performance, so I want manage cost carefully because I publish net performance for my strategies.

 

In terms of the global landscape, I am more bullish on emerging markets over the next 3-5 years but I don’t want to ignore all individual developed countries. Owning several individual country indexes, however, increases the number of holdings and trading cost in my strategies. One of the disadvantages of indexing can be over diversification.  I have used specialized indexes like PFA and PXF in the past very successfully but I am unhappy with their current country and industry allocations. I believe that some developed countries are likely to recover more quickly than others from the current contraction.  Another element I am trying to incorporate in my investment thesis is high quality income and some dividend paying stocks should be considered.

 

As I tracked market action during the last couple of quarters, a few things jumped out in terms of developed country performance. Australia, Canada and Sweden were often leading. I believe the natural resources in Australia and Canada will serve those countries well going forward. Australia’s proximity to Asia could be playing a role in that country as well. In addition, recently the Australian Dollar, Canadian Dollar, and Swedish Krona look like they might have found bottoms over the last few months, and may start to rise as the “flight to safety” trade in the U.S. Dollar runs its course.

 

All this led me to an ETF I had never considered before, the First Trust Dow Jones Global Select Dividend Index Fund (FGD). I have used many dividend paying ETFs over the years. Fortunately, my move out of un-hedged stock positions in 2008 allowed my strategies to only suffer small single digit declines during the period. I am now in the process of rebuilding my strategy and part of it includes a global stock dividend element.

As I looked at FGD, I liked the current country allocation which you can view at FTPortfolios.com or ETFConnect.com. The industry sector breakdown looked attractive as well. A heavy weight in industrials, basic materials and energy will serve the fund well if those sectors lead us out of the current economic trough, which I believe is likely given all the infrastructure spending anticipated worldwide, not to mention their historical lead in market and economic recoveries as illustrated in the graphic below, complements of StockCharts.com. I did not see any financial institutions heavily tied to the credit crisis listed as current holdings, but I am not an expert on global banks. 

 

 

Here is a look at how FGD has performed relative to EFA, a widely used developed market investment, since the rally kicked off in early March.

 

 

I do have some concerns about FGD. Standard deviation is on the high side and the current yield got clobbered in Q1. If 2009 income comes in at half of 2008, it should still yield 5% at the current price. Trading volume is an issue. Consider using limits if you trade FGD. If your order is large enough you can call your trading desk and have them get a IIV (intraday indicative value, also referred to as INAV - intraday Net Asset Value) then ask them to call a few APs (authorized participants – essentially market makers for an ETF) and they will offer to buy or sell your entire order (usually at least several thousand shares) at a set price. Finally, if you are trading in quantities of 50,000 shares or more, you can work with the fund sponsor (First Trust) to have units created and redeemed for you. Interest in the fund has picked up since Q4 and I recently added a position to my strategies. There is a risk First Trust will close he fund but in talking with them I believe they will support FGD for at least the balance of 2009, but there is no guarantee. I estimate the fund is a long way from break even so if it does not attract more money the likelihood of it being closed is high. If they close the fund, I believe the underlying shares are sold by the sponsor and proceeds distributed to fund shareholders, which could trigger a taxable event.

 

In the current climate I think the fund is worth consideration for the reasons outlined above and wanted to bring it to the attention of more investors. I did not go into detail on the index methodology used by Dow Jones to select the stocks in the fund. I would estimate there are around a dozen quant models for dividend index composition attached to current ETFs. It just so happens the method used for the Dow Jones Global Select Dividend Fund produced a set of holdings that I like in this market. Previously I liked the WisdomTree High Yield indexes, up through 2007 that is!

 

Disclosure: Long FGD