Question:
This week I heard a commentator on another station expressing concern the S&P 500 index has become “too concentrated at the top.” A small amount of companies comprise 10% of the capitalization. For investors who index, he recommended “SDY”, sometimes referred to as “the dividend aristocrats.” What do you think of today’s S&P 500? What do you think of today’s SDY? Is it worth switching from the S&P 500 to SDY inside an IRA? Is it worth switching in a taxable account?
Answer:
If you follow the logic of not investing because of too much weight in too few stocks, SPDR S&P Dividend (ETF) (NYSEARCA: SDY) has the same problem, maybe worse. The top five holdings for the S&P 500 comprise 10.9% of the index, while for SDY, the top five holdings comprise 11.4%. The top 10 holdings for the S&P 500 comprise 17.7% of the index, while for SDY, the top 10 holdings comprise 19.8%. Seventeen companies make up the top 25% of the S&P 500, while it is only 14 companies for SDY.
I believe they were probably talking about market capitalization-weighted indices versus dividend-weighted indices. Market cap-weighted makes for a portfolio of relatively large companies based on market capitalization. Likewise, dividend-weighted indices makes for companies with relatively larger dividend. You could do a similar thing in equal weighting the portfolio, such as the Guggenheim S&P 500 Equal Weight (NYSEARCA: RSP).
We have an internal portfolio focused on dividends that has performed well in the current low interest rate environment. As investors are looking for income, many are fleeing fixed income for the relatively better income in dividends. However, you should be careful as the risk in equities is significantly higher than the risk in bonds.
We like both SDY and the S&P 500. Switching in a tax deferred account is a simple decision, as costs are generally low and there should be no tax implications. However, with a taxable account, consider your capital gains, if you bought the S&P 500 in 2009 or later, you probably owe some tax and whether or not to change to SDY is a question of how much SDY will gain in after-tax dollars. Your tax bracket and amount of your gain will affect that decision, as the information will differ with your personal situation.
Question:
With all of the turmoil in the Middle East, it seems counterintuitive that oil prices would be falling. Can you shed a little light on that for me?
Answer:
There are several things working to lower the price of oil at the moment. The long-term price of oil may continue to be pressured by the increase in supply. The Economist magazine recently called North America, “Saudi America.” Oil production in North America is likely to allow the U.S. to import less oil in the future, although we would stop short of saying “oil independence.” Previously, the U.S. imported 75% of our crude supplies. That is expected to fall to 25%, as fracking is helping to increase production.
Short-term, we have higher than expected supplies. For the week ending Sept. 12, supplies increased by 3.7 million barrels. Analysts expected a decline of 1.2 million barrels. Previously, a low supply in Cushing, OK, made some worry the level would get too low for the oil to be pumped out of storage; however, that fear seems to have abated now.
Refining capacity also fell, but by a seemingly small amount. Another issue has been global economic growth. Slower growth in Europe has negatively affected prices, while political unrest elsewhere has also reduced demand.
The biggest issue is the strengthening dollar. Since June 30, 2014, the dollar has improved by 5.83%. Crude oil has fallen 10.3% in that period. All global commodities trade somewhat similar to currencies. Although they have their own supply and demand, which also affects prices, they are generally traded in U.S. dollars. When the dollar increases in value, assets priced in dollars tend to fall because it takes fewer dollars to purchase them. In the same period gold has fallen about 8%. Gasoline prices should be impacted, but we would never bet on it.
When demand falls, the refiners often close for maintenance. This reduces the supply of gasoline and gives the suppliers an excuse to keep prices high. Maintenance also causes crude supplies to increase if all refiners were to shutdown at the same time.
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Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
