NEW YORK ( TheStreet) -- Exchange traded funds enable investors to build portfolios, though dividends can be lacking.
All investment products have drawbacks, and a big one for ETFs is that many sector funds don't pay large dividends. I wrote a similar post on my blog about building financial holdings for a portfolio with an eye toward dividends using a combination of stocks and ETFs. Here I'll do the same with energy.
A couple of weeks ago, I wrote an article for
about the new suite of U.S. small-cap sector funds from
. A reader, a retiree, noted that their dividends are skimpy, rendering them unattractive.
Building portfolios at the sector level was important in the past decade, when the tech and financial industries blew past the
S&P 500 Index
at various points. Historically, when a sector grows past 20% of the S&P 500, it has led to big problems.
The most popular energy proxy is the
Energy Select Sector SPDR
, which has a trailing dividend yield of 1.66%, a little less than the
SPDR S&P 500 ETF
WisdomTree International Energy Sector Fund
can be part of the solution. Its dividend yield is 3.3%, but still not enough for an income-oriented investor.
Experienced investors may be inclined to look at the
Claymore/SWM Canadian Energy Income Index ETF
, which is heavily weighted in Canadian income trusts. But even that fund yields only 3.36%. Many do-it-yourself investors may not be comfortable with stocks because of the risk/volatility potential, but a combination of ETFs and well-researched stocks can make for a reasonable solution.
The energy industry currently comprises 11% of the S&P 500. One way to build a high-yielding sector position would be to put 5% of the portfolio into the WisdomTree International Energy Sector Fund, which is heavy in foreign mega-cap energy companies like
(BP - Get Report)
(TOT - Get Report)
, and the other 6% in a couple of high-yielding stocks from different parts of the industry.
As an example, adding 3% weights in stocks like
Kinder Morgan Energy Partners
, in combination with the WisdomTree ETF, would meaningfully increase the dividend over the Energy Sector SPDR. Ecopetrol is an integrated oil company from Colombia that has a trailing yield of 5.8%. It has a $57 billion market value, carries little debt and has been a good proxy for emerging markets, albeit more volatile than the
iShares MSCI Emerging Market Index Fund
. Kinder Morgan Energy Partners is a pipeline company that currently yields 6.3%. The stock occasionally does nothing for months at a time and then moves much higher. The shares have surged 61% since the market low in March 2009, though the beta -- a measure of volatility compared with the broader stock market -- is only 0.30. One is a perfect correlation.