Three ETF Ideas For A Centerpiece Approach

As time goes on, the attraction of a sort of ‘centerpiece’ approach to investing appeals to me more and more. Being in the full fury of earnings season might have something to do with that (it does, after all, provide a good reminder of how relentlessly short-termist the market can be), and so this post is going to go in a different, slightly more passive direction.

By ‘centerpiece’ I mean stuffing a very small number of ETFs into the heart of a portfolio, supplemented on the edge by any number of preferred quality, preferably defensive (dividend) stocks in the mold of Coca-Cola, PepsiCo, McDonald’s and so on. It ticks the ‘sleep well at night box’, but also the strong sense that many readers share of wanting to own those special blue chips, especially the ‘buy what you know/use’ ones.

We could probably end the post right here with something like VOO (Vanguard’s S&P 500 ETF) or VTI (Vanguard’s Total Stock Market ETF). Both tick all the main boxes: size, expense and composition (a particularly easy one, since they just own everything). But try as I might, owning the Teslas or Alcoas of this world will never quite sit right. Counterintuitive, yes, given the very fine long-term returns of the S&P 500, but we aren’t always rational beings.

Fortunately the United States is very much a land of plenty with respect to financial assets, so there’s no great shortage of alternatives to find. With that, here is a small selection of candidates that would land near the top of my list.

Vanguard High Dividend Yield ETF (VYM)

Nowhere near as crude as its name suggests would be my tagline for this ETF. VYM is an easy opener, and I would wager a very popular one among readers. To understand why I simply present its current top 15 holdings: Johnson & Johnson, Exxon Mobil Corporation, JPMorgan, Procter & Gamble Company, Chevron Corporation, Home Depot, Eli Lilly and Company, Pfizer, AbbVie, Merck & Co, PepsiCo, Coca-Cola Company, Bank of America, Broadcom and Walmart. As ‘passive’ lineups go it is deserving of a chef’s kiss.

VYM ticks major boxes on size (over $50B in AUM) and costs (6bp per annum), and I appreciate the methodology here. Its underlying index basically ranks the eligible universe by yield, as you’d expect, but selects candidates until half of the universe’s market-cap is reached. You end up in a pretty nice sweet-spot: higher yielding names, sure, but weighted toward blue chips. Calling it ‘The Above-Average Dividend Yield Blue Chip ETF’ might be more accurate (but not as nice), and it trades on a current P/E of around 14-15.

Some other points to consider. Firstly, VYM is very diverse (over 400 holdings, typically much higher than peers), and being less concentrated than the average dividend fund may appeal. Secondly, while its underlying index, the FTSE High Dividend Yield Index, doesn’t expressly screen for quality factors, I believe the methodology would tilt it a bit in that direction. Schwab’s US Dividend Equity ETF (SCHD) is a popular alternative and ticks many of the same boxes, though gun-to-head I prefer VYM.

Schwab Fundamental US Large Company ETF (FNDX)

Not a dividend ETF and perhaps not as popular a pick, FNDX is nevertheless an interesting one because it does things quite differently, ranking and weighting by fundamental factors (leverage-adjusted sales, retained operating cash flow and dividends plus buybacks). This bakes in size – its top holdings list is another who’s who of blue chip firms – but in a very different way to market-cap, and as a result that makes FNDX somewhat value oriented. As per Schwab it trades on a P/E in the 13.5-14x range.

FNDX is smaller (~$10b in AUM) and more expensive (25bp) than I’d like, but I’ve included it readers may wish to take a deeper look. For a more middle of the road pick in this slot I’d plump for something like the Vanguard Value ETF (VTV), which has rock bottom expenses (4bp) and is around ten times the size. VTV trades on a current P/E of around 15.

Vanguard Dividend Appreciation ETF (VIG)

A very popular ticker, VIG tracks the S&P U.S. Dividend Growers Index. A stock needs 10-years of consecutive dividend growth to make the cut which, although striking me as a bit arbitrary, does nonetheless result in a high quality basket that its market-cap weighting tilts toward larger names.

It’s another case of ‘let the top holdings do the talking’ here, with UnitedHealth Group, Johnson & Johnson, Microsoft, JPMorgan, Procter & Gamble, Visa, Home Depot, Mastercard, PepsiCo, Coca-Cola, Broadcom, Costco, Walmart, Cisco and McDonald’s making up the top 15. VIG holds around 290 stocks all together, with the top 15 representing almost 40% of assets. Size isn’t an issue (~$65B in AUM), and being a Vanguard name it does well on expenses (again 6bp). VIG’s current P/E is in the 18-20x area based on the average of its constituents, naturally higher than the names above albeit supported by higher profitability.

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One response to “Three ETF Ideas For A Centerpiece Approach”

  1. Jon

    VTV is another to consider. While not strictly a dividend ETF, it contains many similar holdings to VYM, has a decent yield, and 0.04% expense ratio.

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