Exchange Traded Sector Funds
In November of 2007 I took time to restructure the overall account to get further diversification overseas and into REITs and government bond funds. This has been a long term goal for the account. As a format for the diversification I used the article at FundAdvice.com called The Ultimate Buy-And-Hold Strategy. This design, while for the buy and hold investor, can also be used nicely with the AIM method. That is my plan. When I restructured this account in 2002 there was not enough total value to do all the diversifying I wanted at the time. With the account up about 60% in value since then and with a surplus of cash, the restructuring was finally possible.
The article from FundAdvice.com can be considered a suitable guide to how this Retirement Account has been diversified.
For more information on Exchange Traded Sector Index Funds, please link to the NASDAQ ETF Site.
| YEAR (09/15/02 Start) |
Account % GAIN/ LOSS | R.O.C.A.R. Risk Adjusted Return |
S&P 500 Index Fund |
09/15 to Year End |
|||
Return 09/15/02 To 12/31/2009 |
The individual volatility of each sector allow AIM to work each one to its best ability. A diversified mutual fund, like I used to own dampened out all the native volatility of the individual sectors. That might be good for someone not using AIM, but it didn't help me at all.
In September of 2002 I sold out of the diversified mutual fund and split the proceeds into seven new investments. Each would represent a separate part of the economy as a Sector Fund. I chose a relatively new product from IShares known as Exchange Traded Sector Funds (ETF). These are "passively managed" sector index funds mirroring the indicated economic sector. Cost of ownership is very low compared to most actively managed mutual funds and performance is guided not by stock selection, but by sector performance.
Ease of trading is also a gain with ETFs. We can use "Good 'til Cancelled" orders to trade them as well as having the ability to use common Options. This may not seem like much of an advantage, but those who've tried to use AIM with traditional mutual funds will understand the convenience.
Choosing what sectors to own was my next challenge. In making selections, I started with a "Top Down" approach. I first thought about the various parts of the economy that should do well for the next five to ten years. This shortened the list of potential sectors down to a handful. If we feel good about the sectors we're choosing, then the confidence of using AIM to manage those sectors is increased.
As the core of the Individual Retirement Account (IRA) I purchased a long term bond fund. While technically an Exchange Traded Fund it is further distinguished to be a "Closed End Fund." I've used this same bond fund for years as an income producer and feel it is a solid foundation to the IRA. I allocated 40% of total available assets to this part of the account. It was further divided into its AIM Equity and Cash Reserve portions.
I then chose as business sectors Biotechnology (IBB), Consumer Cyclical (IYC), U.S. Energy (IYE), U.S. Financial Service (IYG), U.S. Health Care (IYH), and finally U.S. Technology (IYW). Each of these components received 10% of the grand total available. Again, the amounts were further subdivided into AIM's Equity and Cash Reserve components.
I used my I-Wave to determine what amount should be allocated to the equity and cash sides for all the ETFs. At the starting date the IW was suggesting just 23% Cash Reserve, so 77% was invested. Please check the current I-Wave before starting your own ETF accounts.
By having each sector follow its own lead, AIM then can be proactive with each. If Energy is UP, AIM can sell some of it. If Consumer Cyclicals are DOWN, AIM can be purchasing some of it. This is the strength of a portfolio made up of various AIM Sector funds. In a diversified mutual fund, AIM gets conflicting information. If Energy is UP and Cyclicals are DOWN, AIM might say to do nothing. By separating out these components of a diversified mutual fund AIM can act on your behalf with each.
08/2006 - UPDATE: While IYH and IYC both made money for the retirement account they were rather uninteresting as individual investements managed with AIM. Very few trades occurred which is partially because of market conditions and partly because of the indexes themselves. I decided that while the IBB, IYE, IYG and IYW components were doing fine, IYC and IYH needed to be replaced. I chose a "momentum" index fund based upon Value Line's ranking system for "Timeliness." This should behave differently from the funds replaced. I look forward to reporting more profitable activity with PYH than the other two.