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 TheStreet.com about the new suite of U.S. small-cap sector funds from PowerShares. 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 ( XLE), which has a trailing dividend yield of 1.66%, a little less than the SPDR S&P 500 ETF ( SPY). The WisdomTree International Energy Sector Fund ( DKA) 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 ( ENY), 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 ( BP) and Total ( TOT), 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 Ecopetrol ( EC) and Kinder Morgan Energy Partners ( KMP), 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 ( EEM). 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.
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