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As retirement draws an end to one’s earnings period, a smart allocation of assets is needed to enjoy a regular stream of income. Earlier, a rule of thumb for the retirement corpus was that the stock part of one’s portfolio should equal 100 minus the retiree’s age. For example, if an investor retires at 60, 40% of his total savings would go to stocks and the rest to bonds.
But what should one do in a rocky environment like now? The S&P 500 has seen the worst start this year since 2016. Investors' optimism has waned due to stretched valuations and the uncertainty surrounding the timing of the Fed's rate cuts.
The latest Fed minutes show that it wouldn’t cut rates as aggressively as expected this year.The United States witnessed an addition of 216,000 new jobs in December 2023, surpassing projections of a decline from the previous month.
This triggered fears about no imminent rate cuts as the economy seems to be on a solid footing. There is also a rising concern about the risks that an “overly restrictive” monetary policy may pose for the economy. The disappointing manufacturing data also added to the chaos.
Against this backdrop, below we highlight a few ETF strategies that could be considered in a retirement portfolio with a medium-term focus.
Dividend: The First Bet – 20% of the Portfolio
Be it a bull or a bear market, investors mostly love dividend-paying stocks. After all, who doesn’t like a steady stream of current income along with capital appreciation?
Dividend-paying companies are usually good for value investing and are in demand when volatility flares up. Investors have two options in this field – one with steady dividend growth (or dividend aristocrats) and the other with high yield. Companies that raise dividends regularly appear steadier than those that offer higher yields. But high-yielding ones also make up for the capital losses to a large-extent, if there is any.
So, investors can park 10% of their money into dividend aristocrat ETFs like Vanguard Dividend Appreciation ETF (VIG - Free Report) and ProShares S&P 500 Dividend Aristocrats (NOBL - Free Report) and 10% in high-yield ETFs like First Trust Morningstar Dividend Leaders ETF (FDL - Free Report) (yields 4.51% annually) and Invesco High Yield Equity Dividend Achievers ETF (PEY - Free Report) (yields 4.60% annually).
Don’t Ignore Bonds, Focus on Intermediate Term – 20% Weight
The Fed is likely to cut rates by 75 bps. This should translate into lower interest rates and bode well for bond investing. Moreover, bond investing should not be ignored as even if slowdown risks rise, rates may fall on the increased safe-haven demand and bonds may regain.
Investors can tap intermediate-term bond ETFs that yield decently and should offer the best in both the short and long term. Due to lower duration and maturity than the long-term ones, these bonds offer lesser risks if at all rates do not come down as expected.
Some of the examples of such products are iShares Broad USD High Yield Corporate Bond ETF (USHY - Free Report) (yields 6.69% annually), VictoryShares Core Plus Intermediate Bond ETFUBND (yields 4.40% annually), and iShares iBonds Dec 2029 Term Corporate ETF IBDU (yields 4.25% annually).
International Markets – 20%
Even though the rising rate trend is palpable globally, some international economies are still practicing QE policies. Some economies have started to cut rates and some others are offering better growth potential. Investors thus can bet on Japan, where the QE policy is still in place. Meanwhile, India investing could bring rewards.
WhileVaneck India Growth Leaders ETF GLIN, Global X MSCI Colombia ETF (GXG - Free Report) and WisdomTree Japan Hedged Equity ETF (DXJ - Free Report) are good country-specific bets, the broader international ETFs like International Quantitative ValueShares ETF (IVAL - Free Report) and Alps International Sector Dividend (IDOG - Free Report) can also be tapped.
Cash – 15% Weight
Although cash holding is unattractive amid high inflation, retirees still need to have some cash cushion. Investors can bet on cash-like ETFs like First Trust Low Duration Strategic Focus ETF (LDSF) (yields 4.09% annually) and JPMorgan UltraShort Income ETF (JPST - Free Report) (yields 4.79% annually).
Multi-Asset ETFs – 10%
A multi-asset ETF portfolio is also an intriguing pick as this offers a diversified approach. iShares Core Conservative Allocation ETF (AOK - Free Report) , which yields 2.97% annually, is a good pick. Investors can bet on other products like AXS Astoria Inflation Sensitive ETF (PPI) and FT Vest DJIA Dogs 10 Target In (DOGG) (yields 5.90% annually).
All-Cap Blend Equities – 15% Weight
A retirement portfolio may have all-cap blend stocks in its kitty. This provides a well-diversified approach. Investors can bet on the likes of Vanguard Total Stock Market ETF (VTI - Free Report) ,SP Funds S&P 500 Sharia Industry Exclusions ETFSPUS and iShares MSCI USA Quality Factor ETF (QUAL).
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An ETF Retirement Portfolio for 2024
As retirement draws an end to one’s earnings period, a smart allocation of assets is needed to enjoy a regular stream of income. Earlier, a rule of thumb for the retirement corpus was that the stock part of one’s portfolio should equal 100 minus the retiree’s age. For example, if an investor retires at 60, 40% of his total savings would go to stocks and the rest to bonds.
But what should one do in a rocky environment like now? The S&P 500 has seen the worst start this year since 2016. Investors' optimism has waned due to stretched valuations and the uncertainty surrounding the timing of the Fed's rate cuts.
The latest Fed minutes show that it wouldn’t cut rates as aggressively as expected this year.The United States witnessed an addition of 216,000 new jobs in December 2023, surpassing projections of a decline from the previous month.
This triggered fears about no imminent rate cuts as the economy seems to be on a solid footing. There is also a rising concern about the risks that an “overly restrictive” monetary policy may pose for the economy. The disappointing manufacturing data also added to the chaos.
Against this backdrop, below we highlight a few ETF strategies that could be considered in a retirement portfolio with a medium-term focus.
Dividend: The First Bet – 20% of the Portfolio
Be it a bull or a bear market, investors mostly love dividend-paying stocks. After all, who doesn’t like a steady stream of current income along with capital appreciation?
Dividend-paying companies are usually good for value investing and are in demand when volatility flares up. Investors have two options in this field – one with steady dividend growth (or dividend aristocrats) and the other with high yield. Companies that raise dividends regularly appear steadier than those that offer higher yields. But high-yielding ones also make up for the capital losses to a large-extent, if there is any.
So, investors can park 10% of their money into dividend aristocrat ETFs like Vanguard Dividend Appreciation ETF (VIG - Free Report) and ProShares S&P 500 Dividend Aristocrats (NOBL - Free Report) and 10% in high-yield ETFs like First Trust Morningstar Dividend Leaders ETF (FDL - Free Report) (yields 4.51% annually) and Invesco High Yield Equity Dividend Achievers ETF (PEY - Free Report) (yields 4.60% annually).
Don’t Ignore Bonds, Focus on Intermediate Term – 20% Weight
The Fed is likely to cut rates by 75 bps. This should translate into lower interest rates and bode well for bond investing. Moreover, bond investing should not be ignored as even if slowdown risks rise, rates may fall on the increased safe-haven demand and bonds may regain.
Investors can tap intermediate-term bond ETFs that yield decently and should offer the best in both the short and long term. Due to lower duration and maturity than the long-term ones, these bonds offer lesser risks if at all rates do not come down as expected.
Some of the examples of such products are iShares Broad USD High Yield Corporate Bond ETF (USHY - Free Report) (yields 6.69% annually), VictoryShares Core Plus Intermediate Bond ETF UBND (yields 4.40% annually), and iShares iBonds Dec 2029 Term Corporate ETF IBDU (yields 4.25% annually).
International Markets – 20%
Even though the rising rate trend is palpable globally, some international economies are still practicing QE policies. Some economies have started to cut rates and some others are offering better growth potential. Investors thus can bet on Japan, where the QE policy is still in place. Meanwhile, India investing could bring rewards.
WhileVaneck India Growth Leaders ETF GLIN, Global X MSCI Colombia ETF (GXG - Free Report) and WisdomTree Japan Hedged Equity ETF (DXJ - Free Report) are good country-specific bets, the broader international ETFs like International Quantitative ValueShares ETF (IVAL - Free Report) and Alps International Sector Dividend (IDOG - Free Report) can also be tapped.
Cash – 15% Weight
Although cash holding is unattractive amid high inflation, retirees still need to have some cash cushion. Investors can bet on cash-like ETFs like First Trust Low Duration Strategic Focus ETF (LDSF) (yields 4.09% annually) and JPMorgan UltraShort Income ETF (JPST - Free Report) (yields 4.79% annually).
Multi-Asset ETFs – 10%
A multi-asset ETF portfolio is also an intriguing pick as this offers a diversified approach. iShares Core Conservative Allocation ETF (AOK - Free Report) , which yields 2.97% annually, is a good pick. Investors can bet on other products like AXS Astoria Inflation Sensitive ETF (PPI) and FT Vest DJIA Dogs 10 Target In (DOGG) (yields 5.90% annually).
All-Cap Blend Equities – 15% Weight
A retirement portfolio may have all-cap blend stocks in its kitty. This provides a well-diversified approach. Investors can bet on the likes of Vanguard Total Stock Market ETF (VTI - Free Report) ,SP Funds S&P 500 Sharia Industry Exclusions ETF SPUS and iShares MSCI USA Quality Factor ETF (QUAL).