My 401(K) - Exchanging A Mutual Fund For ETFs, Part 5

Includes: EXC, HDV, NLY, REM, XLU
by: J.D. Welch

Back in August of this year I wrote a four part series of articles about how I was going to transfer money out of a mutual fund that I had been exclusively invested in with my 401k into a number of Exchange Traded Funds (ETFs). I wrapped up Part 4 with the intent to report back once I had accumulated enough payroll withholdings to purchase the last ETF that I had selected, iShares High Dividend Equity Fund (NYSEARCA:HDV).

Well, time marches inexorably onwards, and as of my last paycheck I had withheld enough money that I could make a suitable purchase of HDV in my 401k, one that was within a few dollars of the other two ETFs I had previously purchased, iShares FTSE NAREIT Mortgage Plus Capped Index Fund (BATS:REM) and Utilities Select Sector SPDR (NYSEARCA:XLU). The fourth bucket into which I'm automatically investing a quarter of my withholdings is the Yacktman Focused Service Class mutual fund (MUTF:YAFFX), which fellow Seeking Alpha Contributor Skyler Greene had encouraged me to reconsider and continue to invest in.

Let's take a look at how these three ETFs and one mutual fund are holding up:

As you can see, the yield for REM dropped a dram, but what's not apparent is that its Marco Polo XTF Rating (which is the only consistent rating metric I could find for all of the ETFs I was examining) dropped from 10 to 9.4. Both of these are probably due, in no small part, to the eroding yields and values of most mREITs, especially Annaly Capital Management (NYSE:NLY), which is the largest hold of this ETF.

Regarded Solutions wrote an article last week about NLY and its unfortunate reversal of fortune, and that article prompted me to cut back on my holdings of NLY in my IRA by 50%. As NLY represents more than 20% of REM, I'm now wondering whether it wouldn't be prudent to look for an alternative to REM in my 401k, too.

On the other hand, REM has appreciated 4.57% since I acquired my first (and so far only) shares of it back at the beginning of August. For the time being, I think I'll monitor the situation, and if the health of mREITs gets another red flag, I may decide to sell half of my position in REM and find some other ETF in which to try to generate as much yield as I can safely find.

I'm not surprised that the value of my XLU position is down, since Exelon Corporation (NYSE:EXC), which I hold in my IRA, has been on a downward spiral of late. And while I'm not sure about other utilities, I know that other folks here on Seeking Alpha were complaining in recent weeks that, aside from EXC, most other utilities' prices were sky high. It seems that, if this indexed fund is any indication, that the utility sector in general has enjoyed something of a pullback. That makes XLU a good candidate for my next purchase of ETF shares in my 401k, which will be about two months from now.

HDV's yield, on the other hand, has gone up a bit, while its value has also inched up a smidge since I started tracking it back in early August. I'm not sure about the current composition of this ETF compared to what it was back then, but it would seem that some of the Dividend Champion, Contenders and Challengers that make up this fund may have increased their dividends, which is something I would expect them to do. How else would you account for the value creeping up and the yield creeping up, when these two metrics naturally move in opposite directions from each other?


Aside from keeping an eye on mREITs and REM in general, that does it for this installment of My 401k. There's really nothing more for me to do until I've accumulated enough cash in my account to justify the $7.95 commissions that Fidelity charges for each trade, so I guess I will just sit back, relax, let the cash accumulate, and work out which ETF I will pump up with more shares in two months. Until then, best of luck with all your investments.

Disclosure: I am long EXC, HDV, NLY, REM, XLU. 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.

Additional disclosure: Disclaimer: I am not a professional investment advisor or financial analyst; I’m just a guy who likes to crunch numbers and can make an Excel spreadsheet do pretty much whatever I want it to do, and I’m doing my best to manage my own portfolio. This article is in no way an endorsement of any of the stocks discussed in it, and as always, you need to do your own research and due diligence before you decide to trade any securities or other products.