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3 'Tweaks' to Fortify Your ETF Portfolio

The answer? Reduce HYG and JNK exposure, downshifting into PIMCO 0-5 Year High Yield (HYS) or SPDR Barclay Short-Term High Yield (SJNK). The annual dividend yields that are paid out monthly are only slightly less than the big brothers, but one would have less concern with respect to significant capital depreciation.

2. Shift Away from an All-Market-Cap Weighted Portfolio. If you have invested in the ever-popular SPDR S&P 400 Mid Cap (MDY), you may have a great deal to crow about over the last 12 months. Owners of MDY have 27% unrealized profits on a year-over-year basis.

However, as the bull market rally has strengthened, a number of savvy individuals have started to shift their attention to funds that track different types of indexes. For instance, WisdomTree Mid Cap Dividend Fund (DON) tracks a fundamentally weighted index that measures the performance of mid-caps of the U.S. dividend-paying equities. Dividend stocks tend to hold up better in down markets as well as sideways markets because fewer people sell their income-producers. What's more, the relative strength of DON over MDY has increased in recent weeks.

3. Disregard Sector Rotation Hype by Adding to Your Defensive Equity ETFs. It's as though some analysts are getting cocky about the state of market affairs. While noting that defensive noncyclical stock sectors (e.g., consumer staples, health care, telecom, etc.) have been the best performers between the year's inception and April 15, a better-than-anticipated showing by cyclical segments, (e.g., energy, industrials, materials, etc.) in the last month have many declaring that a rotation into economically sensitive sectors is underway.

The problem with the hype is twofold. For one thing, even the best bull markets take breathers. When that happens, the cyclical sectors are almost certain to take a bigger shot to the jaw then staples-heavy funds like WisdomTree Equity Income (DHS) or health-care dominant iShares High Dividend Equity (HDV). Second, the Relative Strength Factor (RSF) scores for various segments across the last 10 weeks demonstrate that traditionally defensive segments have been increasing their momentum scores whereas the economically aggressive sector ETFs have been fading.
You’re Going To Buy The Aggressive Risk Sectors Now?
RSF Score 02/14 RSF Score 05/13
Aggressive (Cyclical)
SPDR Select Financials (XLF) 89.7 88.5
SPDR Select Industrials (XLI) 72.0 64.3
SPDR Select Energy (XLE) 71.9 51.7
SPDR Select Materials (XLB) 59.2 49.5
Defensive (Non-Cyclical)
SPDR Select Health Care (XLV) 75.9 90.4
SPDR Select Consumer Staples (XLP) 58.1 75.5
Vanguard Telecom (VOX) 49.4 79.4
SPDR Select Utilities (XLU) 37.9 52.8

To the extent that you've been persuaded that now is the time to jump into manufacturing-oriented materials or global-growth oriented energy, rethink the premise. Then consider lightening up your portfolio's exposure. In contrast, if you require more stocks in your basket, be patient for a pullback on the defensive segments. I like iShares High Dividend Equity (HDV) with its dividend-plentiful pharmaceutical companies and global telecom giants. Personally, I would probably wait for a pullback to the 50-day trend line.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Disclosure Statement: ETF Expert is a website that makes the world of ETFs easier to understand. Gary Gordon, Pacific Park Financial and/or its clients may hold positions in ETFs, mutual funds and investment assets mentioned. The commentary does not constitute individualized investment advice. The opinions offered are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial or its subsidiaries for advertising at the ETF Expert website. ETF Expert content is created independently of any advertising relationships. You may review additional ETF Expert at the site.

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