ETFs are basically an alternative to mutual funds that have emerged in the past 10 years or so. Instead of active management like a mutual fund, they follow the passive approach. That is, they just follow and index of some sort, such as the S&P 500 or only buy a certain type of bonds or something like that. They can help a dividend stock investor by providing much needed diversification and it’s a much better choice than mutual funds due to lower expense ratios.
1. JNK (Junk Bond ETF)- 3.8% of my portfolio. In a rising interest rate environment bond ETFs or mutual funds are the absolute worst thing you could possibly be invested in (extremely dangerous for the typical uninformed baby boomer in North America, especially with target date mutual funds), so this is the only bond-related holding I have. The ETF buys less than investment grade bonds, and with that higher risk comes higher reward in the form of a higher interest rate. Although the risk of default for any one individual bond is somewhat high, the risk is spread out through diversification. I will definitely by adding more bond ETFs to my portfolio when interest rates have peaked or are declining.
2. PFF (Preferred Stock ETF)– 4.1% of my portfolio. Preferred stocks are a higher class of shares then common or ordinary stock and they have a couple of advantages: they sometimes pay a higher dividend and they have a higher priority in case of bankruptcy in terms of liquidating the company’s assets. I bought this ETF purely for the high yield and the diversification. They invest in worldwide financial companies, of which I have very limited exposure.
3. VWO (Vanguard Emerging Markets ETF)-8.8% of my portfolio. I have very little in the way of emerging markets companies in my portfolio, so this is an attempt to balance that out. A lot of the growth happens outside of the USA, so it’s necessary to have international holdings, but it’s not always easy to research/invest in companies say in China, which is where an ETF like this is very useful.
Here is a my complete dividend investing portfolio. And of course, my book recommendation (this one best for Americans):