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One of the most common mistakes investors make is going with the known rather than the best...

One 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.
Comments (5)
  • David Jackson
    , contributor
    Comments (1235) | Send Message
     
    "Another: Buying XLF for financials avoids small caps. Look to IYF for broader exposure."

     

    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).
    11 Feb 2013, 10:32 AM Reply Like
  • SA Editor Stephen Alpher
    , contributor
    Comments (546) | Send Message
     
    IYF has outperformed XLF by about 900 bps over the past 5 years, by nearly 1700 bps over the past decade. Not enough to retire on, but somewhat better :)

     

    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
    11 Feb 2013, 11:05 AM Reply Like
  • w3steve
    , contributor
    Comments (9) | Send Message
     
    According to yahoo.com, dividendchannel.com and http://dividata.com, total dividends paid for calendar years 2008-2012 are:

     

    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).
    11 Feb 2013, 05:36 PM Reply Like
  • David Jackson
    , contributor
    Comments (1235) | Send Message
     
    Stephen Alpher, excellent comment - I eat my words!

     

    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.
    12 Feb 2013, 05:47 AM Reply Like
  • w3steve
    , contributor
    Comments (9) | Send Message
     
    To complete the comparison, the 5- and 10-year price performance (through Dec 31, 2012) on a $10,000 investment as mentioned above by Stephen Alpher:

     

    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.
    7 Mar 2013, 02:06 PM Reply Like
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