Tahoe Market Pulse: The best ETFs for the long term
November 4, 2015
Forbes.com recently ran an article titled "How to Invest in the Stock Market Like a Brainiac Economist." In the article, the PhD economists (some Nobel Laureates) chose remarkably similar portfolios.
They were all buy-and-hold index fund investors. Most had large positions in an S&P 500 index fund.
It's easy to understand their thinking. Stocks go up over the long run. Every "correction" and bear market is followed by new highs. So they construct their portfolios to track the stock market while minimizing costs through index funds.
While I agree with their approach, I think one can do better by owning other low-cost index funds. The problem with S&P 500 index funds is that they overweight high-priced stocks.
That's because the S&P 500 is a capitalization-weighted index. I'd rather own an ETF that tracks dividend-paying stocks. On a total-return basis, dividend payers outperform non-dividend payers and are less volatile.
A good ETF to capture this segment is the Schwab U.S. Dividend Equity ETF (SCHD). It yields 2.9 percent and is heavily weighted in the Consumer Staples sector (a 25 percent weighting).
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This sector sells products that consumers need regardless of what is happening in the economy. The five largest stock holdings are Microsoft, Exxon Mobil, Procter & Gamble, Pfizer, and Johnson & Johnson.
What about expenses? The expense ratio is only 0.07 percent, which is in line with the popular low-cost Vanguard funds. So if you invest $100,000 then your cost is only $70 a year.
If you are a Schwab customer, then you can buy SCHD commission free. Otherwise it should only cost about $8 to purchase.
Owning dividend payers is especially timely in today's near-zero interest rate environment. In what environment would such yields be unattractive?
Only one: an environment in which interest rates are so much higher that bonds become more attractive than stocks. If that were expected yields on investment-grade bonds would be rising now.
They are not. The forward curve for Treasurys would also reflect that anticipation. It does not. Utility stocks would be in a bear market. They are not. Yields on our preferreds would be rising and prices falling. They are not.
I'm confident those PhD economists would agree that SCHD is a good buy-and-hold investment.
David Vomund is an Incline Village-based fee-only Registered Investment Adviser. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.
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