This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Blending ETFs, Stocks at the Sector Level

NEW YORK (TheStreet) -- Index Universe recently published an interview with well-regarded investment manager David Kotok from Cumberland Advisors about using ETFs to build a portfolio at the sector level. The interview focused on Cumberland's process and used the health care sector as an example of how to use multiple funds to create the desired exposure.

Kotok notes that he and his team make overweight or underweight decisions for each of the S&P 500 sectors based on "macro inputs" and a "rationale for the decision." Cumberland is overweight health care because he believes all the bad news is priced in and that health care is growing as a portion of GDP. The firm's current exposure in the sector, per the article, consists of the Healthcare Sector SPDR (XLV), iShares Dow Jones US Medical Devices ETF (IHI) and the PowerShares S&P Small Cap Healthcare Portfolio (PSCH).

This is an excellent way to capture the full utility available from the ETF product wrapper. For investors willing and able to devote the time, blending together different exposures within the sector allows for very precise portfolio construction. One step further would be a combination of narrow-based ETFs like Kotok uses and individual stocks.

The advantages in using an ETF/individual stock combination include even more precision as not every segment of the market is represented in an ETF and also the opportunity for higher dividend yields.

10 Stocks That Could Rise in Market Decline >>

For example the Healthcare Sector SPDR has a trailing yield of 1.95% but most of the larger constituents of that fund yield far more than that. Johnson & Johnson (JNJ) is the largest holding in the fund and yields 3.6%. Pfizer (PFE), Merck (MRK) and Abbott Labs (ABT) are also large holdings in the fund and yield 3.92%, 4.37% and 3.37% respectively.

It is reasonable that not every market participant would be comfortable picking stocks in every sector, but increasing the dividend yield of the portfolio is a reason to incorporate at least some individual names.

10 Stocks That Fidelity Funds Are Buying >>

Another consideration is the use of foreign ETFs and thematic ETFs (which may or may not include foreign stocks). We can see the advantage illustrated in the materials sector. The Basic Materials Sector SPDR (XLB) is a domestic fund with 64% in chemicals stocks and only 24% in metals and mining.

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
XLB $49.05 -0.45%
XLV $73.21 -0.77%
MXI $57.18 -0.73%
AAPL $125.33 -0.82%
FB $82.85 -0.41%


DOW 17,880.39 -95.92 -0.53%
S&P 500 2,081.11 -5.13 -0.25%
NASDAQ 4,932.4740 -14.9670 -0.30%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs