Build Your Own ETF?

Here's a random idea I had.

I think I've mentioned that I personally own iShares Dividend Select (DVY). DVY only has US companies. There is no ETF, yet, that captures the same type of effect with foreign stocks. There are some foreign ETFs that yield a 2 handle but I think a product comprised of foreign dividend payers can yield at least 3.5%.

I think there are products that let you build baskets of stocks for a very low cost, something called Folio sounds vaguely familiar, but for now I am only at the concept stage. My initial thought might be to use Sharebuilder. They charge $4 per trade. I have no affiliation with them, but two years ago when my wife's little brother graduated from high school we bought him $200 worth of Guitar Center (GTRC) because he is into music and it doubled, go figure!

I was not able to find any broad based ETFs that own foreign stocks and yield more than 3% (let me know if I missed one). There are a couple of single country products that yield in the 3's but the goal here is a broad based product.

I wrote about a covered call fund that focuses on foreign stocks from ING called Global Equity Dividend and Premium (IGD). I first wrote that a lot of foreign stocks don't have call options so that might mean more of a US weight that you might think ( I can't find portfolio composition anywhere, I have a call in to the fund, I will update this post if they call back). IGD just announced its first monthly dividend and it looks like it will yield about 10% at current prices.

As I have written before I do not expect call option CEFs to capture a lot of the equity market performance but I would expect a dividend based ETF to grow over time.

DVY has 100 stocks in it. I will try to assemble an equal weight fund of 25 names from everywhere but the US. If you embark on a similar idea and go to Sharebuilder it could cost you $100 to implement. I'll do 25 for space and time sake. Most of the choices have alternatives so going to 50 would be quite easy if you were so inclined. Please keep in mind this is just a brainstorming idea. There are all sorts of issues with doing this for real but for now just take it for what it is.

All 25 holdings have a 4% weight (give or take due to rounding errors).

In alphabetical order
STD, IRE, BCM, CM, ABV, DEO, EDP, GSK, LYG, NAB, NHY, PTR, PT, PKX, RTP, SSL, SPI, PCU, SZE, NZT, TEF, TLS, TOT, VOD and WBK.

I put this list through the Morningstar X-ray. The yield of the basket is 4.43% compared to 1.8% for the SPX. The P/E ratio is 11 compared to about 16 for the SPX. 56% of the portfolio is Europe, which makes sense relative to how market cap is distributed around the world. Asia ex-Japan has a 28% weight, Latin America is 8%, Canada is 4% and Africa is 4%. I'd say the regional make up is reasonably diversified. The sector break down is not diversified but neither is DVY. 24% is in Financials, 20% in telecom, 16% in materials, 12% each in energy and utilities , 8% in consumer goods and 4% each in health care and consumer services.

I created the list off the top of my head and was able to avoid client and personal holdings except for two stocks, DEO (clients) and NZT (clients and personal). To reiterate this was just a thought, most of the names are substitutes for client holdings so I do not know them as well as what I actually own for clients. I just thought this would be interesting to do and while I don't know about you, I found it to be very interesting.

The big drawback, someone might say, is how can you keep track of another 25 stocks ( or maybe another 50)? Well, do you own any ETFs now? And do you keep track of every stock in that ETF? Remember the idea is a home made ETF. And if you spend more than ten minutes on the allocation your results might be better than what this group will do.

Lets say an investor has $500,000 of investible assets and they want to be 25% in foreign, or $125,000. Would it be crazy to do something like this with $50,000 of the foreign allocation? Using Sharebuilder it would cost $100 to implement. This may not be your cup of tea but I don't think it is totally upside down either.

To repeat, just an idea to get folks thinking, not a recommendation of any kind.