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Time To Buy ETFs

10/14/08 09:17:21 AM
by Koos van der Merwe

The financial markets of the world are in a recession. What are the best stocks to buy?

Security:   DVY
Position:   Buy

In an interview on the Larry King Live program, money specialist Suze Orman told viewers that the best investment to buy was exchange traded funds, "Because they pay a good yield and you don't have to worry about the price."

Exchange traded funds (ETFs) have proliferated like weeds ever since Barclays introduced them a number of years ago. Today, there are many, with duplicates in the market. Figure 1 is a chart classifying the ETF range.

FIGURE 1: ETFS BY SECTOR/INDUSTRY. Here's a look at a chart classifying the ETF range.
Graphic provided by: Yahoo Finance.
So how do you find the yield an ETF pays? Yahoo Finance has a stock screener. Unfortunately, it only screens stocks for a yield, not ETFs, so we must look at a stock screen and a column that shows a yield.

On January 10, 2007, the Motley Fool published an article entitled "Big Yields From ETFs" the author averred that if you're a fan of ETFs and you seek dividend income, you may be interested in the iShares Dow Jones Select Dividend Index (DVY), an ETF that invests exclusively in dividend-paying stocks.
As of Friday, September 10, the yield on DVY was 5.2% with the price at $42.66. With the Dow Jones Industrial Average (DJIA) falling to ridiculously low levels, the price of the ETF may fall further, giving an even higher yield.

FIGURE 2: ISHARES DJ SELECT, WEEKLY. Note the drop in value.
Graphic provided by: AdvancedGET.
Figure 2 is a weekly chart of DVY showing how the price has fallen from a high of $76.17 on May 25, 2007, to the present low of $38.35, giving the investor the acceptable yield of 5.2%. Of course, there could be iShares offering even greater yields — iShares Italy, Sweden, and Belgium. Question is, are the yields being quoted on a Thomson Reuters stock screen genuine? They seem so high.

Finding the yields for an ETF can be a painfully long and slow process, listing each ETF individually in a stock screen. Then again, the yields quoted could be wrong. The only way we will be able to determine the accuracy of the yields paid is when we receives the yield in dollars and cents. Painfully slow, yes, but could be well worth the effort.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.

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