Still Reeling? ETFs Can Help

1/16/2012


After a tumultuous 2011, fund investors are looking for bright ideas. We have a solution. We found exchange-traded funds that excelled last year — and seem poised to outperform in 2012.

STANDOUT EXCHANGE-TRADED FUNDS
2011 Performance
ETF (Price; Ticker)
Total
Return
(%)
Category
% Rank
Exp.
Ratio
(%)
Category
Small-Cap
SPDR S&P 600 Small Cap ($68; SLY)
1.1
1
0.20
Blend
Rydex S&P SmallCap 600 Pure Gro. ($51; RZG)
4.9
1
0.35
Growth
iShares S&P SmallCap 600 Value ($73; IJS)
(1.7)
10
0.25
Value
Midcap
iShares Morningstar Mid Core ($88; JKG)
1.6
6
0.25
Blend
Rydex S&P Midcap 400 Pure Growth ($82; RFG)
0.2
22
0.35
Growth
iShares Dow Jones Select Dividend ($54; DVY)
11.7
1
0.40
Value
Large-Cap
Vanguard Dividend Appreciation ($56; VIG)
6.1
8
0.18
Blend
Vanguard S&P 500 Growth ($62; VOOG)
4.6
9
0.15
Growth
WisdomTree Equity Income ($43; DHS)
14.2
7
0.38
Value

The table above lists nine standout ETFs — one from each core equity category. The stocks held by all nine funds earn solid weighted-average Quadrix® Overall scores. Importantly, the ETFs have meaningful exposure to stocks with Overall scores above 80 (roughly 26% of fund assets on average) and a low percentage of holdings in stocks with scores below 20 (only 6%). And based on 2011 total return, all but one ETF ranked among the top 10% of its peer group. Two standouts are reviewed below.

Vanguard S&P 500 Growth Index ETF ($62; VOOG) earns a weighted-average Overall score of 72 and Quality score of 81 — both well above peer-group averages. More than 40% of the fund's assets are in stocks with Overall scores above 80, and only 1% of assets score below 20. The fund climbed 4.6% last year, ranking it among the top 9% of large-cap growth funds. Apple ($423; AAPL), after rallying 26% last year, is the fund's largest holding at 6% of assets.


iShares Dow Jones Select Dividend ($54; DVY) focuses on companies with at least five consecutive years of stable or increasing dividends and modest dividend payout ratios. The fund holds 100 stocks and sector exposure leans towards utilities (32% of assets) and consumer discretionary (18%). The expense ratio is 0.40% and the yield is 3.6%. In 2011, the fund surged 11.7%, versus a 2.1% increase for the S&P 500 Index.

2011 performance review

For 2011, our Conservative Portfolio dipped 0.8%, versus a decline of 0.2% for its passive benchmark portfolio. The Growth Portfolio retreated 3.0%, compared to a decline of 2.1% for its custom benchmark. In comparison, the S&P 500 Index gained 2.1%, while the MSCI EAFE Index of international stocks tumbled 12.1% and the Barclays Capital Aggregate Bond Index rose 7.8%.

Both recommended portfolios, with recently updated weightings shown on the right, have topped their respective benchmarks in six of the last 10 years. Over the past decade, the Conservative Portfolio has posted an annualized return of 5.6%, versus 5.1% for its benchmark. The Growth Portfolio returned 5.4%, compared to 4.2% for its benchmark.

RECOMMENDED MUTUAL FUNDS

Target weights for our recommended fund portfolios are being adjusted to reflect the market's bullish primary trend, according to the Dow Theory. Our Growth Portfolio now has 82% in U.S. and international stock funds, 9% in bond funds, and 9% in a balanced fund. For the Conservative Portfolio, the overall weights are at 75%, 19%, and 6%, respectively.

— Year-to-Date —
—– % of Portfolio –—
Fund (Price; Ticker)
Return
(%)
Rank
Conser-
vative
(%)
Growth
(%)
Fund
Rating
American Century Heritage
($20; TWHIX)
4.3
A
6
7
69
Buffalo Growth
($25; BUFGX)
3.4
B
12
12
82
Dreyfus MidCap Index
($27; PESPX)
3.2
D
0
0
76
Dreyfus Small Cap Stock Index
($20; DISSX)
3.1
D
0
0
74
Heartland Select Value
($28; HRSVX)
4.3
A
5
6
43
Homestead Small Company
($24; HSCSX) NEW
3.8
A
7
8
100
Manning & Napier International
($8; EXITX)
1.2
D
7
7
74
T. Rowe Price New Horizons
($32; PRNHX)
2.9
C
10
10
99
Vanguard 500 Index
($119; VFINX)
2.8
D
6
7
74
Vanguard Dividend Growth
($16; VDIGX)
1.5
E
12
12
100
Vanguard Emerging Mkts.
Stock Indx. ($25; VEIEX)
3.9
B
0
4
85
Vanguard GNMA ($11; VFIIX)
0.1
B
5
4
95
Vanguard Inter.-Term Tax
Exempt ($14; VWITX)
0.8
B
0
0
53
Vanguard Short-Term Invest.
Grade ($11; VFSTX)
0.3
B
0
0
92
Vanguard Total Bond Mkt. Index ($11; VBMFX)

(0.1)

E
9
0
59
Vanguard Total Int'l Stock
Index ($13; VGTSX)
2.2
B
5
4
74
Vanguard Wellesley Income
($23; VWINX)
0.6
E
0
0
99
Vanguard Wellington
($32; VWELX)
1.9
C
6
9
87
Wasatch International Growth
($18; WAIGX)
2.7
A
5
5
90
Wells Fargo Advantage High
Income ($7; STHYX)
1.0
D
5
5
60
* Year-to-date ranks through Jan. 10 from Morningstar, comparing performance among funds with same objectives. A = top 20%; B = next 20%; C= middle 20%; D = next 20%; E = bottom 20%. Fund ratings are percentile ranks based on our fund-rating system. NEW Addition to list.

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