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Eric Dutram

Invest Like The One Percent With These Three ETFs

MUB SDY REM

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With income inequality issues and economic protests dominating the headlines as of late, the so-called ‘one percent’ have been in focus. These wealthy individuals—in case you have been living under a rock the past few months—consist of the richest 1% of the populace in the country and control a disproportionate amount of the nation’s wealth.

In fact, some reports suggest that this small group of people possesses more than 40% of all financial assets in the country including half of all stocks, bonds, and funds. Furthermore, they only have just 5% of the debt and are taking home more of the national pay than any time in the past 90 years.

Yet despite these trends and the growing backlash against these ultra-wealthy, little seems likely to be done in order to change the status quo. The major political parties seem unwilling and unable to compromise on any economic issues, especially in an election year, so it looks as though these trends will continue at least into the foreseeable future (see more in the Zacks ETF Center).

While this certainly isn’t good news for those in any of the protest ‘movements’ across the country, there are definitely ways for investors to play the scenario. After all, many of the techniques and strategies being used by the 1% are well known and easy to employ in a personal portfolio and could be great choices for investors seeking to make a similar play with their assets.

This is especially true given the vast proliferation of ETFs over the past few years and all the strategies that these products have opened up to regular investors. Now, mom and pop investors can use many of the techniques that were once reserved for the ultra rich of the country that have millions in liquid assets (One Percenters should also read the Complete Guide to Preferred Stock ETF Investing).

Below, we have highlighted three ETFs in order to help people invest like the one percent. These products look to target many of the methods that ultra-high net worth investors have been using for years in their own portfolios, but in a way that is accessible and cheap to buy for the ’99%’ of investors out there.

iShares S&P National Municipal Bond Fund (MUB - ETF report)

Municipal bonds are securities that are issued by local and state governments in order to build or finance any number of projects ranging from infrastructure improvements to general budget uses as well. Often times, in order to encourage investment, these securities are exempt from federal income tax and are often free from inclusion in AMT calculations as well.

Since regular taxable bonds are taxed at 35% for the top bracket, this can be a huge selling point for rich investors who are seeking to keep their tax liabilities low while still participating in the fixed income world. Luckily for investors looking to apply this strategy with funds, there are a number of muni bond ETFs available.

One of the most popular is iShares’ MUB, a $3 billion dollar fund that has over 2,000 securities in its basket and has an investment grade debt focus. Additionally, the product charges a modest 25 basis points a year in fees while tilting exposure to bonds from California, New York, and Texas (see The Forgotten Municipal Bond ETFs).

In terms of yield, the fund pays out a taxable equivalent yield of about 3% in 30 Day SEC Yield terms while possessing a modest effective duration. While the yield may not sound that impressive, investors should consider that comparable Treasury bond ETFs pay out just 1.5% in comparison, and that is without the tax benefit.

Clearly, for those in the top tax brackets, muni bond funds can provide a decent low risk yield that is far in excess of Treasury bills. With these benefits, investors who are looking to a make a bond investment like the 1% could be well served by looking at the muni space.

Vanguard Dividend Appreciation ETF (SDY - ETF report)

For high income individuals who find themselves in the top income brackets, dividend investing is another popular avenue. That is because dividends are currently taxed at a favorable rate of 15% for high income earners, far less than other types of income.

Thanks to this, it can be beneficial to steer assets towards dividend paying stocks, keep the investment in there for the long haul, and live off the dividend income taxed at the favorable rate. Luckily for investors looking to do this in ETF form, there are a number of quality choices (see 11 Great Dividend ETFs).

One of the more popular is SDY, a fund that tracks the S&P High Yield Dividend Aristocrats Index. This benchmark measures the performance of the 60 highest dividend yielding S&P Composite 15000 constituents that have consistently increased dividends every year for at least the past quarter century.

In a way, this fund represents the ‘one percent’ of dividend stocks, focusing on the top securities in the space that have been among the most consistent dividend growers. Furthermore, the very name of the benchmark—with the focus on ‘Aristocrats’—screams ‘1%’ to many.

In terms of its portfolio, consumer, financials, and industrials comprise the top three sectors, while energy, technology, and telecom are the bottom three. While the yield isn’t enormous, only 3.2% at this point, it is likely to give investors a stable yield at a relatively cheap cost (0.35%), making it an interesting pick for investors looking to mimic the strategies of those in the top income brackets.

iShares FTSE NAREIT Mortgage REIT ETF (REM - ETF report)

In another strong dividend play, investors can consider REM. Not only is its payout impressive, but the fund focuses on real estate, a hallmark of one percenter investing. While it is true that regular investors can miss out  on certain tax benefits that can come with outright real estate purchases, there are also a number of headaches—tenants, repairs, etc.—that can be avoided with an ETF/REIT approach.

Furthermore, REM’s dividend will be extremely tough to beat as the product currently has a 30 Day SEC Yield of 13.4%. While the fees are a little high at 48 basis points, this still means that after fees, the payout on the product will be approaching 13% a year.

Add in the tax benefits that are afforded to dividend income, and investors could have a solid choice on their hands with this 28 security fund. Furthermore, the product has a very reasonable PE ratio—below 14.25—while the beta is less than 0.7 (read Top Three High Yield Real Estate ETFs).

This suggests that the product will be relatively stable, allowing investors to sit back and watch the dividends roll in, just like the real members of the one percent!

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