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An ETF Retirement Portfolio for 2021

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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 the 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 many strategists now see the end of success in the 60-40 standard portfolio. J.P. Morgan recently commented that a traditional 60/40 portfolio will deliver annual returns of 3.5% over the next decade compared with 10% over the past few decades. The key reason is meager interest rates from government bonds in a rock-bottom interest rate scenario(read: Is 60/40 Rule Obsolete Now? 5 High-Yielding ETFs to Play).

But such arguments are not holding true lately as balanced funds (which put their assets in a mix of stocks and government bonds) have offered double-digit gains while offering protection in a market downside. “Most have not been able to outperform a 60-40 portfolio. There’s a reason why [60/40 rule] exists,” said Scott Kimball, a portfolio manager at BMO Global Asset Management, as quoted on MarketWatch.

Against this backdrop, 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) and 15% in high-yield ETFs like Vanguard High Dividend Yield Index Fund ETF Shares (VYM - Free Report) (yields around 3.14%) and Invesco High Yield Equity Dividend Achievers ETF (PEY) (yields 4.34% annually).

Bond Bull Market Likely to Continue – 20% Focus

With grave concerns about receding global growth still at the forefront, investors can expect the current trend of a subdued long-term U.S. treasury yields to remain in 2021. This should be a great scenario for bond investing. Though the global economies will rebound in 2021 with vaccine hopes, the central banks are less likely to raise rates. Moreover, a recovering economy would support risk-on sentiments for some more time.

To do so, investors can tap investment-grade funds like iShares Short-Term Corporate Bond ETF (IGSB - Free Report) (yields 2.44% annually). FlexShares High Yield ValueScored Bond ETF (HYGV), which yields 6.16% annually, can be an option to play in the junk-bond space.

Value Stock ETFs – 20% Weight

Given the dirt-cheap valuation at the current level, 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 (PXMV) should prove gainful. For the international market, investors can take note of Legg Mason International Low Volatility High Dividend ETF (LVHI - Free Report) . LVHI yields 4.20% annually.

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) and WisdomTree US Quality Dividend Growth ETF (DGRW) should be on investors’ agenda.

Growth & Momentum – 20% Weight

A certain amount of risk should be tested too as most central banks of developed economies are in the patient mode now and trade tensions subside. For this, investors can bet on some in-momentum sector ETFs that boast of 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) appear as solid bets.

 

Broad Market ETFs with Low Expense Ratio – 5% 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 - Free Report) (ER – 0.03%) and SPDR Portfolio World ex-US ETF (SPDW) (ER – 0.04%).

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