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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 was off to the worst start to a year since 1939. Rates are rising to contain sky-high inflation while growth is stumbling. Recessionary risks are in the making. Global markets have been seeing a surge in energy prices after a long stretch while the easy money policy is ending globally.
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 dividend 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) 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 4.44% annually) and Invesco High Yield Equity Dividend Achievers ETF (PEY) (yields 3.87% annually).
Don’t Ignore Bonds, Focus on Shorter Term – 20% Weight
As far as rates are concerned, the benchmark treasury yield started the week ended May 6 with 2.99% and closed the week at 3.12%, hitting the highest level since 2018. As rising rates wreak havoc both on equities and bonds market, investors are finding themselves clueless about future investments.
Bond investing should not be ignored as even if recessionary risks rise higher, rates may fall on the increased safe-haven demand and bonds may gain again. Plus, investors can tap short-term bond ETFs that yield handsomely. Due to lower duration and maturity, these bonds offer lesser risks amid a rising rate environment, though these are high-yield in nature.
Some of the examples of such products are iShares iBonds 2023 Term High Yield and Income ETF (yield-to-maturity is 5.46%) and Invesco BulletShares 2023 High Yield Corporate Bond ETF (YTM 5.81%). Invesco Global Short Term High Yield Bond ETF (PGHY) has an YTM of 11.03% as of May 5, 2022.
Value Stocks – 15% Weight
Given the relatively lower valuation at the current level, a retirement portfolio should have value picks in it. Plus, value stocks perform better in a rising rate environment. SPDR Portfolio S&P 500 Value ETF (SPYV - Free Report) is a good pick out here. It yields 2.07% annually.
Commodities – 20%
In a rising rate environment, commodities come across as excellent bets. This year is no different as commodities, both liquid, hard and soft, have been staging an uptrend.
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 - Free Report) (yields 2.06% annually)and JPMorgan UltraShort Income ETF (JPST - Free Report) (30-DAY SEC yield 1.48% annually).
International Markets – 10%
Even though the rising rate trend is palpable globally, some international economies are still practicing QE policies. iShares International Select Dividend ETF (IDV - Free Report) (yields 5.51% annually) (down 1% last week) and Cambria Foreign Shareholder Yield ETF (FYLD - Free Report) (yields 5.20% annually) (down 0.1% last week) are examples of two ETFs that have been high momentum. These yield handsomely.
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An ETF Retirement Portfolio for 2022
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 was off to the worst start to a year since 1939. Rates are rising to contain sky-high inflation while growth is stumbling. Recessionary risks are in the making. Global markets have been seeing a surge in energy prices after a long stretch while the easy money policy is ending globally.
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 dividend 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) 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 4.44% annually) and Invesco High Yield Equity Dividend Achievers ETF (PEY) (yields 3.87% annually).
Don’t Ignore Bonds, Focus on Shorter Term – 20% Weight
As far as rates are concerned, the benchmark treasury yield started the week ended May 6 with 2.99% and closed the week at 3.12%, hitting the highest level since 2018. As rising rates wreak havoc both on equities and bonds market, investors are finding themselves clueless about future investments.
Bond investing should not be ignored as even if recessionary risks rise higher, rates may fall on the increased safe-haven demand and bonds may gain again. Plus, investors can tap short-term bond ETFs that yield handsomely. Due to lower duration and maturity, these bonds offer lesser risks amid a rising rate environment, though these are high-yield in nature.
Some of the examples of such products are iShares iBonds 2023 Term High Yield and Income ETF (yield-to-maturity is 5.46%) and Invesco BulletShares 2023 High Yield Corporate Bond ETF (YTM 5.81%). Invesco Global Short Term High Yield Bond ETF (PGHY) has an YTM of 11.03% as of May 5, 2022.
Value Stocks – 15% Weight
Given the relatively lower valuation at the current level, a retirement portfolio should have value picks in it. Plus, value stocks perform better in a rising rate environment. SPDR Portfolio S&P 500 Value ETF (SPYV - Free Report) is a good pick out here. It yields 2.07% annually.
Commodities – 20%
In a rising rate environment, commodities come across as excellent bets. This year is no different as commodities, both liquid, hard and soft, have been staging an uptrend.
Goldman Sachs analysts said last year that the recovery in commodity prices, “will actually be the beginning of a much longer structural bull market” that could mimic the boom in 1970s. Invesco DB Commodity Index Tracking Fund (DBC - Free Report) and United States Brent Oil Fund LP (BNO - Free Report) can be timely picks.
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 - Free Report) (yields 2.06% annually)and JPMorgan UltraShort Income ETF (JPST - Free Report) (30-DAY SEC yield 1.48% annually).
International Markets – 10%
Even though the rising rate trend is palpable globally, some international economies are still practicing QE policies. iShares International Select Dividend ETF (IDV - Free Report) (yields 5.51% annually) (down 1% last week) and Cambria Foreign Shareholder Yield ETF (FYLD - Free Report) (yields 5.20% annually) (down 0.1% last week) are examples of two ETFs that have been high momentum. These yield handsomely.