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As retirement draws an end to one’s earnings period,a smart allocation of assets is needed in order to enjoy a regular stream of income. Earlier, a rule of thumb was followed for retirement corpus which said 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 now, with rising rate talks coming up now and then in 2018, one now needs to be more balanced about the stock-bond allocation. Below we highlight a few ETF strategies that could be considered in a retirement portfolio with a long-term focus.
Dividend: The First Bet – 30% 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 dividend regularly appear steadier than those that offer higher yields. But then high-yielding ones also make up for the capital losses to a large-extent, if there is any.
So, investors can park 15% 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 15% in high-yield ETFs like iShares Emerging Markets Dividend ETF (DVYE - Free Report) (yields around 5.62%), WisdomTree Global ex-US Real Estate Fund DRW) (yields about 7.38% annually) or Invesco High Yield Equity Dividend Achievers ETF (PEY - Free Report) (yields 4.04% annually).
Bond Bull Market Likely to Continue – 20% Focus
With grave concerns about receding global growth coming to the forefront, investors can expect the current trend of a decline in long-term U.S. treasury yields to continue in 2019. This should be a great scenario for bond investing.
The Euro zone and Japan have slowed this year and the United States has been showing signs of peaking growth. If this trend holds for a longer period of time, central banks are likely to pursue an easy money policy for a few more months, which will pull down bond yields and boost prices.
To do so, investors can tap investment-grade funds like iShares Short-Term Corporate Bond ETF IGSB(yields 3.47% annually)and Xtrackers Investment Grade Bond – Interest Rate Hedged ETF IGIH (yields 3.52% annually). While IGSB has low rate sensitivity, IGIH is interest-hedged and offers protection in case of a sudden spike in yields.
Investors can also have global exposure with Invesco Global Short-Term High Yield Bond ETF PGHY, which yields about 5.40% annually. SPDR Portfolio Aggregate Bond ETFSPAB is a good low-cost choice for total bond market exposure. It yields about 2.95% annually (read: How to pick the Best ETFs and Mutual Funds).
Value Stock ETFs – 15% Weight
Given a whiff of uncertainty for 2019, a retirement portfolio should have value picks in it. For the U.S. market, a middle-of-the-road approach with Invesco S&P MidCap Low Volatility ETF (XMLV - Free Report) and Invesco Russell MidCap Pure Value ETF should prove gainful. For the international market, investors can take note of Legg Mason International Low Volatility High Dividend ETF (LVHI - Free Report) (read: 5 Low P/E Lucrative Value ETF Picks).
Quality Exposure With 5% Weight
Investors can seek safety in high quality stocks and related ETFs. Quality stocks are generally rich in value characteristics like strong return on equity, low earnings variability, higher free cash margins and low debt-to-equity.
So, iShares Edge MSCI USA Quality Factor ETF (QUAL - Free Report) , VanEck Vectors Morningstar Wide Moat ETF (MOAT - Free Report) and WisdomTree US Quality Dividend Growth ETF (DGRW - Free Report) should be on investors’ agenda.
Growth & Momentum– 20% Weight
A certain amount of risk should be tested too if most central banks of developed economies turn more patient in 2019 and trade tensions subside. For this, investors can bet on some in-momentum sector ETFs that boast considerable long-term potential.
Consider an expense ratio (ER) of 1%, a fund of $10,000 invested at 8% annual return will grow to $19,672 in 10 years, while the same fund invested at an expense ratio of 0.1% will grow by a higher amount of $21,390. This makes it clear why a dirt-cheap expense ratio is needed. In order to tap such gems, investors can follow Schwab U.S. Broad Market ETFSCHB (ER – 0.03%) and SPDR Portfolio World ex-US ETF SPDW(ER – 0.04%).
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An ETF Retirement Portfolio for 2019
As retirement draws an end to one’s earnings period,a smart allocation of assets is needed in order to enjoy a regular stream of income. Earlier, a rule of thumb was followed for retirement corpus which said 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 now, with rising rate talks coming up now and then in 2018, one now needs to be more balanced about the stock-bond allocation. Below we highlight a few ETF strategies that could be considered in a retirement portfolio with a long-term focus.
Dividend: The First Bet – 30% 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 dividend regularly appear steadier than those that offer higher yields. But then high-yielding ones also make up for the capital losses to a large-extent, if there is any.
So, investors can park 15% 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 15% in high-yield ETFs like iShares Emerging Markets Dividend ETF (DVYE - Free Report) (yields around 5.62%), WisdomTree Global ex-US Real Estate Fund DRW) (yields about 7.38% annually) or Invesco High Yield Equity Dividend Achievers ETF (PEY - Free Report) (yields 4.04% annually).
Bond Bull Market Likely to Continue – 20% Focus
With grave concerns about receding global growth coming to the forefront, investors can expect the current trend of a decline in long-term U.S. treasury yields to continue in 2019. This should be a great scenario for bond investing.
The Euro zone and Japan have slowed this year and the United States has been showing signs of peaking growth. If this trend holds for a longer period of time, central banks are likely to pursue an easy money policy for a few more months, which will pull down bond yields and boost prices.
To do so, investors can tap investment-grade funds like iShares Short-Term Corporate Bond ETF IGSB (yields 3.47% annually)and Xtrackers Investment Grade Bond – Interest Rate Hedged ETF IGIH (yields 3.52% annually). While IGSB has low rate sensitivity, IGIH is interest-hedged and offers protection in case of a sudden spike in yields.
Investors can also have global exposure with Invesco Global Short-Term High Yield Bond ETF PGHY, which yields about 5.40% annually. SPDR Portfolio Aggregate Bond ETF SPAB is a good low-cost choice for total bond market exposure. It yields about 2.95% annually (read: How to pick the Best ETFs and Mutual Funds).
Value Stock ETFs – 15% Weight
Given a whiff of uncertainty for 2019, a retirement portfolio should have value picks in it. For the U.S. market, a middle-of-the-road approach with Invesco S&P MidCap Low Volatility ETF (XMLV - Free Report) and Invesco Russell MidCap Pure Value ETF should prove gainful. For the international market, investors can take note of Legg Mason International Low Volatility High Dividend ETF (LVHI - Free Report) (read: 5 Low P/E Lucrative Value ETF Picks).
Quality Exposure With 5% Weight
Investors can seek safety in high quality stocks and related ETFs. Quality stocks are generally rich in value characteristics like strong return on equity, low earnings variability, higher free cash margins and low debt-to-equity.
So, iShares Edge MSCI USA Quality Factor ETF (QUAL - Free Report) , VanEck Vectors Morningstar Wide Moat ETF (MOAT - Free Report) and WisdomTree US Quality Dividend Growth ETF (DGRW - Free Report) should be on investors’ agenda.
Growth & Momentum– 20% Weight
A certain amount of risk should be tested too if most central banks of developed economies turn more patient in 2019 and trade tensions subside. For this, investors can bet on some in-momentum sector ETFs that boast considerable long-term potential.
Invesco DWA Healthcare Momentum ETF (PTH - Free Report) ,SPDR FactSet Innovative Technology ETF XITK, iShares North American Tech-Software ETF (IGV - Free Report) and a host of Kensho ETFs like SPDR Kensho Intelligent Structures ETF XKII and Kensho Future Security ETF XKFS appear as solid bets(read: Profit from the New Economy with These AI Powered ETFs).
ETFs with Low Expense Ratio – 10% Exposure
Consider an expense ratio (ER) of 1%, a fund of $10,000 invested at 8% annual return will grow to $19,672 in 10 years, while the same fund invested at an expense ratio of 0.1% will grow by a higher amount of $21,390. This makes it clear why a dirt-cheap expense ratio is needed. In order to tap such gems, investors can follow Schwab U.S. Broad Market ETF SCHB (ER – 0.03%) and SPDR Portfolio World ex-US ETF SPDW (ER – 0.04%).
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>