I had initiated a started position in WisdomTree International Basic Materials Sector Fund (DBN) in middle of October 2008 at $22.13 per share. At the time of purchase, my yield on cost was 1.16%. This index-based ETF is derived from the WisdomTree’s DEFA Index. It is based on dividend-paying companies in developed markets outside US and Canada. The companies in this index are weighted based on regular cash dividends.
My primary reason for investment in this fund was exposure to international developed countries and material sector. Investing in one index-based ETF provided me exposure to two different aspects. The secondary reason was that the fund is over weighted to top 15 companies. The top 15 companies have close to 55% weight in the index fund.
Since October 2008, the funds value has declined to $16.15 per share (from $22.13). Conversely, the cash dividend paid for year 2008 increased to $1.094 per share (from $0.26 per share). My YOC is now at 4.86%. Now let us look at funds performance in context of my portfolio?
Risk analysis of DBN in my portfolio
This fund continues to meet my buying objective of exposure to international assets and materials sectors.
The fund being top heavy is a two edge sword. This fund does not provide true diversification one would expect from an ETF. On the other hand, it provides concentrated investment in top 15 dividend paying companies from developed international market. In essence, the dividend performance of the top 15 companies will drive the performance of this fund.
At least for the first year, the fund had a growing dividend. Although I do believe that this will not be case in future years. I fully expect that dividends from this fund will be erratic at best.
The fluctuation of US dollar vis-à-vis other currencies is another aspect that will affect the dividends paid by this fund.
Dividends from DBN are only 2% of my total dividends, while the capital allocation is only at 4% or less. With is small position, any dividend cuts or volatility does not have a significant effect on my total dividend portfolio.
The issue that I have with this fund is that it provides dividend only once a year. I am not happy about this characteristic of the fund. It slows down my dividend compounding machine.
My plan with DBN
I will continue to hold DBN in my dividend portfolio. It continues to meet my buying objective. Since I have small position, my expectation is it with not have significant effect on my performance. My expectation is over the next 3 to 5 years, this fund will aid in my capital appreciation. However, I will not be adding any new capital in this fund because of only one dividend per year and expected lack of consistency in dividend growth.
This fund does not fall in the dividend growth classification. It only provides international materials exposure with cash dividends still being the criteria.
One of basic tenets of portfolio construction is following the principles of asset allocation. This is much more applicable and valid for do-it-yourself individual investors. In this context, at a minimum, I need to look at and at least consider evaluating all possible asset classes. While doing this, I also have to keep in mind that my portfolio is based on dividend growth philosophy. Among others, a commodity is also one asset class which I believe I should be investing. The next question is what should be my investing vehicle.
Since 2001, quite a few commodity index based Exchange Trade Funds (ETF) and Exchange Traded Notes (ETN) were introduced in the market. There are more than 30 commodity ETFs/ETNs of various flavors based on agriculture, raw metals, coal, water, oil, natural gas, gold, silver, different combinations of these in index format, etc. And how can we forget, the biggest sham of all investment vehicles, futures-based index ETFs/ETNs. My viewpoint is, futures-based index are just designed for speculation. As it always happens, during the speculative boom of late 2007 and early 2008, every month a commodity ETF or ETN was launched in market in one form or other. continue reading rest of the article….