The investment community seems to be aflutter over the fact that the California Public Employees' Retirement System (CalPERS) posted strong returns for its most recent fiscal year and is embracing passively managed investment products.

CalPERS, the $262 billion pension fund responsible for keeping public employees such as DMV workers, librarians and lifeguards living the high life in retirement, had a 12.5 percent gain on investments for the fiscal year ended June 30 and earned 19 percent on its publicly traded equity holdings, according to Bloomberg.

That is nice, but CalPERS has almost $329 billion in unfunded liabilities.

CalPERS' equity portfolio is massive in terms of number of constituents, but the pension fund's top-five holdings have not exactly set the world on fire since June 30, 2012. Maybe that is a sign that as part of its new found affinity for passively managed investments, CalPERS should also embrace ETFs.

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Over the just completed fiscal year, Exxon Mobil (NYSE: CVX) was far better, gaining 12.87 percent, showing CalPERS was rewarded for its investment in a California company. Chevron was 1.33 percent of the equity portfolio at the end of Q1.

However, another California company by the name of Apple (NASDAQ: AAPL) burned CalPERS to the tune of 30 percent loss from June 29, 2012-July 1, 2013. Apple was the second-largest CalPERS equity holding at the end of Q1. The other technology stock among the CalPERS top-five holdings is International Business Machines (NYSE: IBM), which lost 2.2 percent over the fund's last fiscal year. At least General Electric gained 12 percent for CalPERS.

Enter ETFs
As Bloomberg notes, the S&P 500 was up 18 percent over the same 12 months that CalPERS equity holdings returned 19 percent. However, CalPERS could have done better and generated some much needed income by plunking some of its billions into several large, highly liquid dividend ETFs.

That 19 percent lags the returns offered by the the following quartet of popular dividend ETFs: The Vanguard Dividend Appreciation ETF (NYSE: VIG), the Vanguard High Dividend Yield Indx ETF (NYSE: VYM), the WisdomTree Dividend ex-Financials Fund (NYSE: DTN) and the SPDR S&P Dividend ETF (NYSE: SDY). SDY outpaced CalPERS by 470 basis over the pension's most recent fiscal year.

CalPERS could have also grabbed some small-cap exposure with the high-yielding PowerShares High Yield Equity Dividend Achievers Portfolio (NYSE: PEY), which gained almost 20 percent over the time frame in question. PEY is almost 50 percent allocated to small-caps and like DTN, pays a monthly dividend.

Dividend ETFs are not just an option for CalPERS, these products are must haves because of the pension's soaring obligations. What so many of the stories that laud CalPERS' returns fail to mention is that although the fund claims its average pension is just over $2,400 a month, the number of retirees receiving $100,000 or more a year from CalPERS is soaring.

That number was just 1,841 in 2005, but surged to 14,763 last year, a 700 percent gain in a decade where inflation was 38 percent, according to the Orange County Register.

Sector Bets
Clearly, Apple and IBM have not been great trades over the past year for CalPERS or for anyone long those stocks. Both stocks are down, but CalPERS could have made 9.1 percent in the Technology Select Sector SPDR (NYSE: XLK) while still getting ample Apple and IBM exposure. Those stocks currently combine for 19.6 of the ETF's weight.

Or CalPERS could have really gone outside of the box and embraced equal weight ETFs such as the Rydex S&P Equal Weight Technology ETF (NYSE: RYT). RYT gained 24 percent during the most recent CalPERS fiscal year.

As for Exxon and Chevron, at least those CalPERS holdings are up. However, there is more compelling evidence the fund's active management is failing retirees and California taxpayers. Exxon and Chevron gained an average of 9.2 percent during the just completed CalPERS fiscal year, half the returns offered by the Vanguard Energy ETF (NYSE: VDE) over the same time.

For more on ETFs, click here.

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