Building The $100,000 7% Retiree CEF/ETF Portfolio: Materials ETFs Don't Make The Cut

| About: Vanguard Materials (VAW)


This is the 8th article in the series looking to build a $100,00 7% annual cash yield portfolio while preserving capital as well.

Basic resource CEFs and ETFs are split among many types of funds so that it was impossible to find a series of comprehensive resource funds.

This article back tested 5 materials ETFs and found them lacking in cash production.

Materials ETFs are best left to speculators and are not suitable for retiree portfolios.

This is the 8th article in this series where I am attempting to put together a $100,000 portfolio of CEFs and ETFs that offer 7% cash annually while at the same time maintaining or growing capital. This series covered health care where the CEFs HQH and HQL were selected as the 2 best funds for this purpose; it also covered utility funds where BUI and/or UTF were selected and REIT funds where RFI and RNP were selected as the best funds. The very first article in the series covered high yield bond funds where HYB stood out as best alternative in that group. These funds were selected on the basis of back testing CEF and ETF funds over the last 5 years. This article is an attempt to find a basic resource fund that will meet the objectives of the portfolio. The search results for basic resource CEF funds are shown below.

Source: CEF Connect Web Site

When these issues were placed in the TD Ameritrade compare funds table, all but one was an energy fund. The resulting table is presented below.

Source: TD Ameritrade Web Site

My goal was to have natural resources such as metals and other natural resources along with energy companies within 1 fund, but BCX was the only CEF that met the criteria. Therefore BCX was used to seek similar funds in TD Ameritrade's fund seeking table and the results of that search are displayed below.

Source: TD Ameritrade Web Site

Since BCX was the only CEF that met the criteria and the ETFs in the table above were all materials funds, I found it necessary to change the goal of this article and split it into two different articles. Instead of just a natural resources fund for the portfolio I decided to look at materials funds and energy funds independently in order to cover both areas. This article deals with materials funds and a later article will deal with energy funds.

A search for materials CEFs came up empty since there were not any comparable CEFs to the ETFs shown above. The search for materials ETFs is shown in the table below.

Source: TD Ameritrade Web Site

The table above became the source of the 5 materials ETFs back tested for 5 years: they are Vanguard Materials ETF (NYSEARCA:VAW), Materials Select Sector SPDR ETF (NYSEARCA:XLB),Guggenheim S&P 500 Eq Wt Materials ETF (NYSEARCA:RTM), iShares US Basic Materials (NYSEARCA:IYM), PowerShares DWA Basic Materials Mom ETF (NYSEARCA:PYZ).

The back test of VAW is shown below.

Source: Interactive Brokers Web Site

The market price of VAW started at about $85.00 a share in June 2011 and it currently sells for $104.00 per share. The shares of this ETF have been very volatile over the past 12 months with a low of $79.00 and a high just short of $110.00 per share and it is well below its high of $114.00 in February of last year. Dividends started the first year at $1.576 per share and $2.16 per share was paid the last full year. Dividends were paid annually until September of last year but now are paid quarterly. The dividends only offer a 2% yield, a long way from the 7% goal for this portfolio. It would be difficult to impossible to make up the 5% shortfall by selling shares because that action would cause a loss of capital; capital gains have been too low and it would be difficult to time sales with the high volatility of the stock so this fund does not fill the bill for this portfolio.

The next ETF to back test is XLB.

Source: Interactive Brokers Web Site

XLB shows the same high volatility seen in VAW. It was selling around $39.00 a share 5 years ago and now sells for $47.00 per share. Furthermore it had a low of $36.00 in the past 12 months, which was below the beginning price 5 years ago. XLB like VAW also shows a high in February 2015 that is well above its current market price. The dividend for the first year was $0.75 per share and the dividend for the latest 4 quarters was $0.95 per share to offer a 2% yield. XLB falls short of the goal of a 7% return and it does not have the capital gains to make up the 5% difference, so it does not meet the requirements of the portfolio.

The next issue to graph for 5 years is RTM.

Source: Interactive Brokers Web Site

RTM starts at around $65.00 per share and currently sells for $85.00 per share, a 31% increase in the market price. This ETF just as the others had a low of $64.00 a share in the past 12 months, which was lower than the $65.00 starting price of the issue. Dividends started at $0.90 per share for the first year and ended at $1.29 for the last 4 quarters. At the current market price this ETF is yielding about 1.5%; another yield that is far too low to meet the qualifications for a 7% return. Considering that there is a 31% increase in the market price of the issue, if one managed purchases and sales of this issue at exactly the right time, one could have reaped a 7% return. However that defeats the purpose of having a 7% cash return portfolio geared for a retiree. The funds included in it should be self-sustaining without market timing stock buys and sales and therefore RTM is eliminated from consideration for this portfolio also.

The next ETF to consider is IYM.

Source: Interactive Brokers Web Site

IYM starts and ends at nearly the same market price for the 5-year period; starting at about $77.00 per share and ending at $78.00 per share. In the past 12 months it had a low of $58.50 per share, way below the starting and ending figure. Dividends paid out by this ETF started at $1.47 per share in the first year and ended at $1.40 for the last 4 quarters, paying more at the beginning of the 5 year period than it is now. With a paltry yield of 1.8% IYM does not meet the criteria for inclusion in this 7% portfolio since dividends and capital gains produced less than 2% over the 5-year period.

The last ETF to look at is PYZ.

Source: Interactive Brokers Web Site

Here at last is an ETF that at least is showing some positive momentum with capital gains. PYZ starts the period at about $38.00 per share and is currently selling for $54.00 per share, a 42% increase over the 5 years. But this ETF also had a 52 week low that was lower than the beginning price 5 years ago. The dividend for the last 4 quarters added up to $0.646 per share, a little over 1%, which was a slight increase over the $0.50 at the beginning of the 5 year period. Even though there was a 42% increase in market price of PYZ, volatility and an extremely low dividend yield makes it unwieldy for a retiree portfolio where the main goal is a 7% cash return on capital.

Every one of these materials ETFs dipped below their beginning market prices 5 years ago over the past 12 months. This is not the kind of performance that retirees look for when investing for income. The retiree looking to reap 7% and keep one's capital sound should avoid this sector. A major goal of this CEF/ETF portfolio is to leave the buying and selling to the professionals who manage the funds and not have to do it oneself so these funds are not suitable for this portfolio.

Disclosure: I am/we are long RNP, UTF.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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