Sectorology

A couple of weeks ago, we discussed how the S&P 500 was turning into a tech fund. Barron's took up the conversation this weekend and included a list of ETFs that should help reduce tech exposure. 

If you're interested, you can look through and decide for yourself if any of them are worth owning.

The message from from my post was that if you build a portfolio at the sector level, it is easy to just reduce the exposure you have to tech/communications and you can also layer in small exposures to negatively correlated strategies to reduce the portfolio's beta. A little more nuanced would be to use SPXT which is the S&P 500 excluding technology. Using SPXT would allow for very precisely dialing the tech exposure. As you can see from the top holdings though, there is plenty of what I would call tech-like beta.

Back in March we looked at a broad based index strategy from Research Affiliates that combines quality, value and momentum. We built the idea by equal weighting SPHQ, SCHD and SPMO. Owning those three instead of market cap weighted S&P 500 would combine to a 33% weighting to tech plus communications versus 45% for the S&P 500. QVML is an ETF that combines those three factors but its weighting to tech plus communications is just over 44%. 

If a portfolio went 2/3 domestic with SPHQ, SCHD and SPMO and 1/3 foreign (20% ACWX 13% EMXC), then the total to tech plus communications would add come down slightly to 32%. ACWX is light on tech, EMXC is heavy in tech from Taiwan Semi, Samsung and SK Hynix. 

Yahoo had a weak retirement article that included a discussion about how to allocate to bonds and the idea that Social Security is essentially an annuity. 

One guy was all over the comments banging the dividend zealot drum. This comment captures where he is coming from.

If one invest in quality stock for dividend then the dividend income will always be there and the stock will go up in the long run. If your interested in dividend why would one care about stock going down? Quality company will always recover, dividend will at least be the same or more throughout the recession and recovery !

There is a stock market graveyard full of the exact type of companies he is talking about that were once quality stocks with "good" dividends. Washington Mutual, General Motors, JC Penny, Walgreens and countless others I am forgetting. 

Who knows what he actually means but the comment reads like he is oblivious to the possibility that down the road some quality stock with a "good" dividend that he cares about could disappear. The strategy he favors is of course valid but guy, great companies disappear. How about Bethlehem Steel and most of the rest of the steel industry?

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.