One of my favorite investment products is the exchange traded fund (ETF). I have been using ETFs since 1995, but I still find many managers who do not believe in the tactical use of these vehicles.
I tend to use specific ETFs when I believe there is an easy-to-understand reason to own that index. It is also important that there is a mispricing that represents a potential chance for gain as the pricing inefficiency is corrected. This month I would like to review three ETFs, I currently own.
Powershares QQQ Trust (QQQ)
Over the last few months, I have liquidated specific technology stocks and my holdings in the SPDR Technology Fund (XLK). I sold the stocks to eliminate concentration risk and raise cash for the QQQ purchase.
I also sold the XLK as we awaited Apple’s (AAPL) bottoming process. I believe strongly in the technology sector as being somewhat bargain priced, rich in cash and able to raise dividends and buy back stock. I believe QQQ is a way for me to gain exposure to a broad exposure to these stocks and still own a relative bargain.
iShares Core Midcap (IJH)
Since 2000 I have preferred to use the S&P 400 mid-cap index over the S&P 500 as our core market holding. I continue to believe we are in a secular bull market and not concerned with the higher volatility of the S&P 400 ETF.
WisdomTree European Small Cap Dividend Fund (DFE)
In 2009, I began to believe the European banks had not come clean on their financial woes. At that time I decided Europe would solve its economic problems 2-3 years behind the progress being made here in the US. I decided to use the DFE for several reasons.
First I wanted a fund whose holdings earned the majority of their revenue in Europe. Smaller companies accomplish this goal. Secondly I did not want to invest in any single country. Though I have no hard evidence to support this, I believe that DFE is the only ETF that fulfills this goal.
Lastly I wanted to use WisdomTree’s product as this is a somewhat income oriented account and WisdomTree’s models seek out those companies with growing dividend streams. (Dividends reflect past performance and there is no guarantee they will continue to be paid.)
I believe this mix of funds accomplishes my ETF goals. Using a tactical GARP based approach to round out portfolio holdings, add diversification and yet still focus investments into areas that meet our macro view of the foreseeable future.
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The investments discussed are held in client accounts as of September 30, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.
We are a registered investment adviser firm based in Texas. CJ Brott founded our firm in 1984. Since 1980 he has been lecturing regularly on financial topics at Southern Methodist University. He is a sought-after public speaker and has been interviewed by various national and local financial publications. We benefit from CJ’s many industry contacts when making investment decisions.