The midpoint of the year is often a great time to step back and assess your ETF portfolios strengths and weaknesses relative to your investment goals. With six months of data in the rear view mirror, you can clearly evaluate your best and worst performing positions to determine if changes need to be made or new opportunities sought out.

In addition, many savvy investors take this time to rebalance existing positions or reinvest quarterly dividends as a result of distributions that are sure to be hitting your brokerage account in the near future. All of these small changes can add up to a great deal of performance enhancement as we may our way through the latter half of the year.

1. Review

The first step in this process is to review every position in your portfolio. This is particularly important as the market sits near all-time highs and has gone nearly 20 months since testing its 200-day moving average.

This year has presented some wide divergences amongst individual sectors, market caps, and asset classes. A quick look at the nearly 5% gap between the 6.39% year-to-date gain in the SPDR S&P 500 ETF (SPY) and the 1.48% gain in the iShares Russell 2000 ETF (IWM) shows just how much different this year looks from 2013.


The initial bout of volatility that we experienced in the first quarter truly shifted the market mindset from chasing fast growth stocks to repositioning capital in stalwart dividend paying companies. We are also seeing marked strength in defensive sectors such as the Utility Select Sector SPDR (XLU) over high beta themes such as the Consumer Discretionary Select Sector SPDR (XLY).

The multi-year low in the CBOE VIX Volatility Index is another cautionary warning sign that we may be due for another modest wave of fear in the near future as well.

If you find yourself still overweight high beta areas such as small caps, internet stocks, or retail sectors, you may want to consider pairing back those positions in light of their recent underperformance. If we do see a more persistent pullback this summer, those weaker names could certainly lead on the downside.

One potential conservative equity alternative is the PowerShares S&P 500 Low Volatility Portfolio (SPLV), which has continued to hold up quite well this year and offers a monthly dividend stream as well. This offers you the ability to still participate in an equity ETF with potentially less risk than a fully-loaded stock index.

Lastly, consider reviewing your stop losses to ensure your risk management game plan is still in place. Trailing stops are a great way to ensure your sell point moves higher when the price of the ETF moves up with the market.

2. Rebalance

Another important mid-year consideration is to look at rebalancing any ETFs that have experienced an outsized move (either up or down) to bring them back in line with your target portfolio asset allocation. For example, the Market Vectors India Small Cap ETF (SCIF) has gained over 50% in 2014, which means an investment in this ETF will now have a much larger pull on the total portfolio than at the beginning of the year.

In addition, large cash distributions or transfers from your accounts can often skew the remaining portfolio positions to produce an asymmetrical asset allocation structure.

I typically only recommend rebalancing ETF holdings that are considerably out of line with your target percentage. Be wary of racking up trading fees to make small adjustments unless it’s necessary to your overall investment goals. Fortunately many brokerage companies are now offering commission-free trading on select ETFs to make rebalancing even easier.

3. Reinvest

The end of the quarter always signals a deluge of dividends from both equity and fixed-income holdings that will either be distributed as cash or reinvested as additional shares in the position. International holdings in particular often throw off big distributions this time of year as special dividends and fiscal year end profits are declared.

The iShares International Select Dividend ETF (IDV) recently declared a total distribution of $0.87 with an ex-date of June 24. This single dividend payment represents 2.19% of the current share price, which is a significant impact to shareholders. This income will be paid several days later and should be considered part of your total return when calculating individual fund performance.

Everyone has a different rationale for handling dividend payments based on their unique preferences or cash flow needs. My preferred option is to reinvest the capital back into the original position. This allows you to continue to compound your investment, which will then lead to greater income or capital appreciation down the line.

Many brokerage companies allow you to reinvest your ETF dividends in fractional shares without paying additional trading commissions.

The Bottom Line

Constructing a portfolio of ETFs that work in harmony together to generate wealth is only half the battle. Successful investors stay on top of their holdings and make subtle adjustments to fine tune their asset allocation at various points throughout the year. This can lead to better analysis and decision making when it matters most. As always, having a plan and implementing it decisively will produce superior results.

FMD Capital Management, its executives, and/or its clients may hold positions in the ETFs, mutual funds or any investment asset mentioned in this article. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities.

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