I loved the movie Best in Show; no busy bee here.A reader left a question about buying best of breed stocks. Specifically he wondered about looking at fundamentally weighted ETFs and taking what he referred to as the first or second choice of that ETF. He noted possibility doing this for each sector.
I think there are two ETF providers with sector funds that are fundamentally weighted; WisdomTree's foreign products and PowerShares RAFI sector funds which are domestic. As a footnote I believe WisdomTree has domestic sector funds in the works.
Let's look at a few sectors and see what the number one holding gets us; the foreign name first followed by the domestic.
Financials: HSBC, Citigroup
Health: Glaxo, Pfizer
Telecom: Vodaphone, AT&T (VOD personal holding)
Industrials: Siemens, GE
Energy: Eni, Exxon Mobil
The important thing is what gets done from this point. These ten names and grabbing the top holdings from the other fundamentally weighted sector ETFs provides a list of fine companies but I don't think anyone stopping here will end up with very good diversification.
These companies are all certainly large cap and more likely mega cap. They all have relatively low volatility, tilt, as a group, way to the value side of the style ledger, the foreign exposure tilts very heavily to developed Europe and there are probably a few other things that don't immediately come to mind.
I think that the idea of building out from here is plausible for anyone with enough time and the realization of what the flaws are of stopping with the best of breed.
All of that being said I have never thought of starting with "best of breed" in the way the term is used. The term pretty much never enters my consciousness. I do have core holdings but as I'll talk about in this week's video sometimes those get sold too.
Within each sector there are various things I will want to capture like certain countries, sub-sector themes, emerging market, high beta and so on. It is the mix of everything that creates the final result and for me it would take more than 20 large cap stocks to make it work.
5 comments:
I was al ittle confused by your take on best of breed. It seems you only looked at lage cap vechiles. What about micro cap, small cap, mid caps, and growth etfs. Wouldln't this change the large cap bias.
roger, do you have a suggestion about how to learn more about preferred equity investing. i talked with a fido rep in fixed income. He said that if one was to look at a continuum of aggressivenss in fixed income it would be high yield stocks where yield can change, then preferreds where yield is fixed, and then bonds. Not sure how accurate the statement is but my quest is to learn more about investment for income. rep offered a few web sites. From what you have written, are preferreds the major source ofyour managed portfolio income?
two things;
The context of the question was pulling from fundamentally weighted ETFs sector by sector.
The other thing is I have never heard of "best of breed" applied to micro cap, small cap, mid cap or growth which is the entire point of the post.
changing the large cap bias is the whole enchilada of why what most people think of best of breed is not really that diversified.
preferred stocks make up, on average 15-20% of the fixed income portion. A preferred stock with a maturity of 30 years with no call date will be much more volatile than a short dated issue.
anything can be dnagerous or not, depending on how its used. if you spend the time you will find some preferreds that look volatile and some that don't. i would not devote too much to generalities
Best In Show...That is one of my all-time favorite movies. I laughed so hard my stomach hurt. One of the best ensembles of terrific character actors anywhere.
(I've partially stepped off of my soapbox!)
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