An ETF ready for market turmoil

This fund is strong and well-diversified to withstand current conditions.

By TheStreet Staff Oct 12, 2010 10:29AM

the streetFind hot stocks © Digital Vision / Getty ImagesBy Don Dion, TheStreet

 

With Alcoa's (AA) analyst-beating quarterly report behind us, we are now in the full swing of what is shaping up to be an optimistic earnings season.


Investors looking for a way to play this fast-paced market should look to a strong, stable and diversified fund designed to track U.S. equities.

 

The iShares Dow Jones Select Dividend Index Fund (DVY) is one of my favorite ETFs that meet these criteria. I currently carry this fund in a number of my client and subscriber ETF portfolios, including ETF Action.

Because it is designed to track a basket of 100 well-known companies from across the investment spectrum, DVY will benefit from a positive round of earnings.


Among the fund's top positions are household names such as Lorrilard (LO), McDonalds (MCD), Chevron (CVX) and Caterpillar (CAT).

 

DVY does not particularly depend on the performance of these few holdings, however. In total, the fund's top 10 positions account for less than 20% of its total portfolio.


The largest percentage of DVY's index is composed of large names such as those listed above, and Morningstar (MORN) considers the fund to be large-cap-value oriented.

 

However, DVY also allocates a considerable portion of its assets to companies considered mid-cap. This has allowed the fund's year-to-date performance to fall between those of dedicated large-cap funds such as SPDR S&P 500 ETF (SPY) and outperforming mid-cap-focused products such as the iShares S&P 400 MidCap Index Fund (IJH).

 

If the markets are due for a leg higher during this current earnings season, DVY should continue to perform in this fashion.

 

While I am bullish, I also understand that this investing environment can be unpredictable. Although its performance will be strongest in times of strength, DVY also has a few lines of defense to ensure that investors are protected in the event that the market turns south.

 

From a sector perspective, DVY is defensive minded. Utilities and industrials represent two of the largest slices of the fund's index. Together, they make up more than 40% of its total portfolio. Shoppers also heavily influence DVY's performance, with consumer goods and services accounting for an additional 24% slice.

While this breakdown will provide support if the market slips, DVY's strong dividend will ensure that investors continue to see consistent income no matter the economic conditions.

 

DVY's index is dedicated to picking companies that have offered a relatively high dividend on a constant basis. Currently, the fund is yielding nearly 4%.

 

As we head deeper into this earnings season, investors should stock up on well-balanced funds that have exposure to U.S. companies that will perform well.


However, at the same time, it is important not to forget the overarching economic issues that continue to weigh on the mood of the market. A fund such as DVY will provide investors with a chance to benefit from prosperity and protect against turmoil.

 

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