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Is 60/40 Rule Useless in 2022? 4 High-Yielding ETFs to Play
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As one enters the retirement period, a smart allocation of assets is needed to enjoy a regular stream of income. Earlier, a rule of thumb was followed by 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.
However, the recent coordinated selloff in stocks and bonds, thanks to rising rates, has demolished one of the most popular strategies for long-term investors or retirees: the 60/40 portfolio. According to data from strategists at Bank of America Global Research published last week, the 60/40 portfolio — a mix of 60% stocks and 40% bonds — this year was down 19.4% till the end of August, and is headed for its worst year since 1936, as quoted on Yahoo Finance.
Stocks struggled to start September on a positive note. The Fed is like to hike rates at least by 50 bps this month. The Fed has been super-hawkish this year posing challenges for investors both in the stock and bond markets. “The 17% rally off the June lows appears to have been just a typical bear market rally, which occurred 1.5 times on average per bear market," per BofA, the Yahoo article noted.
Vanguard’s chief economist for the Americas, Roger Aliaga-Díaz noted, the objective of a 60/40 portfolio divided between stocks and bonds is to achieve annual returns of around 7% on average. But an average annual return of 7% doesn't mean that most years will see a return of 7%, as quoted on the Yahoo article.
Though the 60/40 portfolio is not fully dead given the historical standard, this is not going to work this year. “The relationship between asset classes has changed so much that many investors now buy equities not for future growth but for current income, and buy bonds to participate in price rallies,” said Bank of America strategists in 2019, as quoted on MarketWatch.
In the current edgy environment, investors may want to rely on higher current income. We have highlighted below a few high-yielding ETF options for today’s tough environment.
Dividend-Heavy ETFs
One solution to deal with higher interest rates could be investing in dividend-oriented stocks that offer benchmark-beating yields. However, one has to choose companies with a history of dividend payments and decent yields too.
Schwab U.S. Dividend Equity ETF (SCHD - Free Report) follows the Dow Jones U.S. Dividend 100 Index, which is designed to measure the performance of high-dividend yielding stocks issued by U.S. companies that have a record of consistently paying dividends, selected for fundamental strength relative to their peers, based on financial ratios. It yields 3.44% annually and charges 6 bps in fees.
Convertible Bond ETFs
Convertible bonds are those that can be exchanged if the holder chooses to, for a specific number of preferred or common shares if the company's share price climbs past a said conversion price during the bond's tenure. The main difference of the asset with the traditional bonds is that convertible bonds offer investors the right to convert their bond holdings into a company’s shares at the holder’s discretion.
SPDR Bloomberg Barclays Convertible Securities ETF (CWB - Free Report) is designed to represent the market of U.S. convertible securities. It yields 2.51% annually and charges 40 bps in fees. CWB beat the S&P 500 in the past one and three month periods.
Private Equity ETFs
Private equity firms bring in the much-needed cash to small and medium-sized companies. Private equity is composed of funds and investors that directly invest in private companies, or that engage in buyouts of public companies, resulting in the delisting of public equity.
Invesco Global Listed Private Equity ETF (PSP - Free Report) includes securities, ADRs and GDRs of 40 to 75 private equity companies, comprising BDCs, MLPs and other vehicles whose principal business is to invest in, lend capital to or provide services to privately held companies. The fund yields as high as 12.03% annually and its expense ratio is 1.44% (read: Fearing Stagflation? ETF Strategies to Win).
Senior Loan ETFs
Senior loans are issued by companies with below investment grade credit ratings. In order to make up for this high risk, senior loans normally have higher yields. Since these securities are senior to other forms of debt or equity, these give protection to investors in any event of liquidation. As a result, default risk is low for such bonds, even after belonging to the junk bond space.
Senior loans are floating rate instruments and provide protection from rising interest rates. In a nutshell, a relatively high-yield opportunity coupled with protection from the looming rise in interest rates should help the fund to perform better.Highland/iBoxx Senior Loan ETF could thus be a good pick for the upcoming plays. It yields around 3.74% annually and charges 66 bps in fees.
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Is 60/40 Rule Useless in 2022? 4 High-Yielding ETFs to Play
As one enters the retirement period, a smart allocation of assets is needed to enjoy a regular stream of income. Earlier, a rule of thumb was followed by 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.
However, the recent coordinated selloff in stocks and bonds, thanks to rising rates, has demolished one of the most popular strategies for long-term investors or retirees: the 60/40 portfolio. According to data from strategists at Bank of America Global Research published last week, the 60/40 portfolio — a mix of 60% stocks and 40% bonds — this year was down 19.4% till the end of August, and is headed for its worst year since 1936, as quoted on Yahoo Finance.
Stocks struggled to start September on a positive note. The Fed is like to hike rates at least by 50 bps this month. The Fed has been super-hawkish this year posing challenges for investors both in the stock and bond markets. “The 17% rally off the June lows appears to have been just a typical bear market rally, which occurred 1.5 times on average per bear market," per BofA, the Yahoo article noted.
Vanguard’s chief economist for the Americas, Roger Aliaga-Díaz noted, the objective of a 60/40 portfolio divided between stocks and bonds is to achieve annual returns of around 7% on average. But an average annual return of 7% doesn't mean that most years will see a return of 7%, as quoted on the Yahoo article.
Though the 60/40 portfolio is not fully dead given the historical standard, this is not going to work this year. “The relationship between asset classes has changed so much that many investors now buy equities not for future growth but for current income, and buy bonds to participate in price rallies,” said Bank of America strategists in 2019, as quoted on MarketWatch.
In the current edgy environment, investors may want to rely on higher current income. We have highlighted below a few high-yielding ETF options for today’s tough environment.
Dividend-Heavy ETFs
One solution to deal with higher interest rates could be investing in dividend-oriented stocks that offer benchmark-beating yields. However, one has to choose companies with a history of dividend payments and decent yields too.
Schwab U.S. Dividend Equity ETF (SCHD - Free Report) follows the Dow Jones U.S. Dividend 100 Index, which is designed to measure the performance of high-dividend yielding stocks issued by U.S. companies that have a record of consistently paying dividends, selected for fundamental strength relative to their peers, based on financial ratios. It yields 3.44% annually and charges 6 bps in fees.
Convertible Bond ETFs
Convertible bonds are those that can be exchanged if the holder chooses to, for a specific number of preferred or common shares if the company's share price climbs past a said conversion price during the bond's tenure. The main difference of the asset with the traditional bonds is that convertible bonds offer investors the right to convert their bond holdings into a company’s shares at the holder’s discretion.
SPDR Bloomberg Barclays Convertible Securities ETF (CWB - Free Report) is designed to represent the market of U.S. convertible securities. It yields 2.51% annually and charges 40 bps in fees. CWB beat the S&P 500 in the past one and three month periods.
Private Equity ETFs
Private equity firms bring in the much-needed cash to small and medium-sized companies. Private equity is composed of funds and investors that directly invest in private companies, or that engage in buyouts of public companies, resulting in the delisting of public equity.
Invesco Global Listed Private Equity ETF (PSP - Free Report) includes securities, ADRs and GDRs of 40 to 75 private equity companies, comprising BDCs, MLPs and other vehicles whose principal business is to invest in, lend capital to or provide services to privately held companies. The fund yields as high as 12.03% annually and its expense ratio is 1.44% (read: Fearing Stagflation? ETF Strategies to Win).
Senior Loan ETFs
Senior loans are issued by companies with below investment grade credit ratings. In order to make up for this high risk, senior loans normally have higher yields. Since these securities are senior to other forms of debt or equity, these give protection to investors in any event of liquidation. As a result, default risk is low for such bonds, even after belonging to the junk bond space.
Senior loans are floating rate instruments and provide protection from rising interest rates. In a nutshell, a relatively high-yield opportunity coupled with protection from the looming rise in interest rates should help the fund to perform better.Highland/iBoxx Senior Loan ETF could thus be a good pick for the upcoming plays. It yields around 3.74% annually and charges 66 bps in fees.