by Marc Bastow | April 3, 2013 1:00 pm
With the first-quarter’s raging bull in the books, it’s probably a good time to count up all of our winners and re-evaluate our holdings. Let’s face it: A lot of us out there are just a tad concerned — perhaps due to our time horizon — that this rally can’t last forever (none of them do), so we want to look for ways to mitigate some risk.
While I might not suggest a total cash-out on stocks that are staring at big gains, it might be prudent to take some profits out of the biggest lunkers, then redeploy that money into some exchange-traded funds where we can spread out that risk among a much larger basket of stocks.
I like these three ETFs of three somewhat varying flavors because they provide a combination of risk protection via diversification, as well as income:
YTD Performance: +10.5%
Expense Ratio: 0.09%
What better way to take single-stock risk off your plate without exiting the market than … well, buying the market? The SPDR S&P 500 ETF (NYSE:SPY), which tracks all 500 of the index’s components, is highly diversified across all the major sectors, and boasts a crazy-low expense ratio of less than a tenth of a percent! So, you get access to a score of blue-chips like General Electric (NYSE:GE) and Johnson & Johnson (NYSE:JNJ) without having to worry about the fallout from a single stock hitting the skids.
Best of all, exposure to this broad-based index also means exposure to a number of dividend stocks, resulting in a yield of roughly 2% — nothing to scream about, but it’s better than the 10-year T-Note right now.
However, you should note that the fund is weighted by market cap, which means stocks like $400 billion Exxon Mobil (NYSE:XOM) have more effect on the fund than, say, $2 billion First Solar (NASDAQ:FSLR). But again, the weight is spread across 500 stocks, so even a huge dip in XOM wouldn’t shatter the SPY.
YTD Performance: +11.73%
Expense Ratio: 0.1%
Vanguard’s High Dividend Yield Index ETF (NYSE:VYM) is similar to the SPDR S&P 500 ETF in that it bunches hundreds of blue-chip companies together, but its specific purpose is investing in companies with higher dividend yields — and as a result, you’re looking at nearly a full percentage point more in yield than the SPY. And its year-to-date performance helps to show that you’re not necessarily sacrificing capital gains for that extra income.
Top holdings are fairly similar to the SPDR S&P 500 ETF — you’ve got Exxon, as well as Chevron (NYSE:CVX) and Microsoft (NASDAQ:MSFT), among others — though some of those top holdings carry significantly more weight (and thus, the fund is more susceptible to moves in those stocks) than they do in the SPY.
YTD Performance: +3.02%
Expense Ratio: 0.48%
The iShares S&P U.S. Preferred Stock Index Fund (NYSE:PFF) is a wholly different way to diversify, as we’re actually talking a different asset class: preferred shares.
Preferred stock often is called a “hybrid security,” since it has elements of both common stock and bonds. Preferreds provide a steady stream of income just like stocks — and, in fact, their dividends usually are higher than common stocks, and must be paid out before common stocks, meaning that payout is safer. However, they’re also are a rated security just like bonds, and they generally don’t carry voting rights.
The PFF is the largest ETF of its kind, by both assets ($10.75 billion) and number of holdings (288). The majority of the fund’s preferred shares are from financial and bank stocks like Wells Fargo (NYSE:WFC) and Bank of America (NYSE:BAC), though it also holds the preferreds of other companies such as General Motors (NYSE:GM).
Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he was long MSFT and XOM.
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