ETF Connect

ETF Connect

I recently revisited ETF connect. I had read in several places that is was an excellent site so the other day I checked it out and I think it can provide great research.

I am a big fan of ETFs and closed end funds. They can be used as tools in building a properly diversified portfolio. The site has an info page on almost every ETF and closed end fund. Click here for an example of what this looks like.

Over the next few weeks I plan to profile a series of funds and ETFs to try to assess quality and usefulness for a portfolio. I won't profile anything I own for myself or for clients to avoid any conflict of interest. But that is not to say I won't talk myself into buying something that I write about.

The first fund I'll examine for this series is Delaware Investments Dividend and Income fund (DDF). The description for this fund says income is the first priority and capital appreciation comes second. Its top holdings include Dow Chemical, Starwood Resorts, Alltel and a bunch of preferred stocks. The fund is a monthly pay with a current yield of 8.3%, nice, and it trades at a 5.6% discount to its net asset value.

If you don't have much experience with closed end funds there is a relevant issue with all of them which is leverage. This fund can use up to 25% leverage to achieve its income goal. There is not great way that I know of to get current information on how much leverage is being used. Usually, this is not a problem but it can be an issue. Not, very often but every few years you might hear of a fund that blew itself up due to leverage. By and large most managers know how to manage leverage, but the point is important to understand.

Back in the days before Exchange Traded Funds were so popular, a lot of attention was devoted to whether a particular closed end fund traded at a discount or premium. I would not get too caught up on this issue. A discount or premium can persist indefinitely. I would be more interested in whether there has been a sharp move in the discount or premium. Fortunately ETF Connect has a chart of this on each fund page. DDF has not had a substantial change in many months.

I use preferred stocks in the portfolios I manage to create an income component. I like the blend of high yielding low beta stocks this fund offers. Reguardless of what is going on in the market some low beta high yield is appropriate, some times more, sometimes less but at least some. By the way it is much easier to trade preferred stocks on the NYSE than to buy bonds over the counter. You can email me for more details if you would like.

So how can this fit into a portfolio? Given the names in the fund I am inclined to think that if it correlates to any type of equity investment the closest would be large cap value. You can click here to see that it does correlate to the iShares Russell 1000 Value fund (IWD). In the last four years however DDF is down 8% and IWD is up 8%. The correlation gets tighter and tighter with shorter time periods. It is not clear why the correlation has become tighter, Michael Dugan has been the manager since 1998 (by the way I had to go to Morningstar's site to see how long the manager has run the fund). It is important to note that DDF yields 8.3% compared to 2.4% for IWD. In a trading range market that could be an important difference. Based on past performance I would expect that if the market has a huge rally IWD will leave DDF in the dust.

My conclusion is that this seems like a good fund, and if you can realize it will lag in an up market but give a good yield, and it might be a good hold in a portfolio that is less than $100,000.