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Crafting a balanced portfolio is a common desire of investors. In this pursuit, 60/40 has proved to be one of the winning and time-tested strategies. It refers to a portfolio comprising 60% equities and 40% bonds. From the 1980s until recently, a portfolio of 60% stocks and 40% bonds has experienced solid returns, per Morgan Stanley.
However, 2022 has yielded the worst returns in 100 years for this classic strategy, as quoted on MarketWatch. BofA Global calculated the return of this strategy as negative 30% so far this year. BlackRock’s Rieder now calls for a 40/60 division to stay afloat in today’s environment of high inflation, steep rate hikes and heightened geopolitical tensions, as quoted on MarketWatch.
Notably, the S&P 500 is down 24.8% this year (as of Oct 14, 2022). iShares 20+ Year Treasury Bond ETF (TLT - Free Report) has retreated 33.5% this year. Since, the latest inflation reading has come in at market-beating level, we expect more steep rate hikes from the Fed this year. Plus, most developed market central banks have been walking the same path to tame inflation. The benchmark treasury yield reached 4% on Oct 14, 2022.
For the current edgy environment, we have built a portfolio for investors that may come across as safer and high-yielding.
High-Yield Interest-Hedged ETFs – 20%
High-yield interest-hedged ETFs take care of rising rate risks while providing solid current income. This ETF has proven to be pretty resilient in this year’s turmoil.
ProShares High Yield-Interest Rate Hedged ETF (HYHG - Free Report) comprises long positions in USD-denominated high-yield corporate bonds and short positions in U.S. Treasury notes or bonds of approximate equivalent duration. The ETF yields 5.03% annually and is down 7.2% this year.
Convertible Bond ETFs – 10%
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 between the asset and 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.
First Trust SSI Strategic Convertible Securities ETF (FCVT - Free Report) puts at least 80% of its net assets in a diversified portfolio of U.S. and non-U.S. convertible securities. It yields 4.85% annually and charges 95 bps in fees. FCVT has lost 2.2% in the past three months.
Senior Loan ETFs – 10%
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 4.29% annually and charges 66 bps in fees. SNLN is down 7.9% this year.
TIPS ETFs – 10%
TIPS are government bonds whose face value rises with inflation. TIPS ETFs not only combat increasing prices but also protect income for the long term.
Investors might want to retain money amid the uncertainty. We believe cash and short-dated fixed income may play a greater role in adding stability to a portfolio.
Preferred stock is a type of stock that has characteristics of both stocks and bonds. Like bonds, preferred shares make cash payouts, often at a higher yield than bonds, while offering higher dividend returns and less risk than common stock. Invesco Variable Rate Preferred ETF (VRP - Free Report) yields 5.33% and charges 50 bps.
Dividend-Heavy ETFs – 15%
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) measures the performance of high-dividend-yielding stocks issued by U.S. companies that have a record of consistently paying dividends. It yields 3.65% annually and charges 6 bps in fees. SCHD is down 16% this year.
Consumer Staples Stocks – 10%
This high-quality sector, which is largely defensive, has a low correlation factor with economic cycles. Research shows that consumer staples companies mostly outperform in times of market turbulence. Hence, staples ETF outperformed the S&P 500 Index this year. Consumer Staples ETF (XLP - Free Report) has declined 3% past month against a 6% drop in the S&P 500.
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Time for a 40/60 ETF Portfolio Instead of 60/40?
Crafting a balanced portfolio is a common desire of investors. In this pursuit, 60/40 has proved to be one of the winning and time-tested strategies. It refers to a portfolio comprising 60% equities and 40% bonds. From the 1980s until recently, a portfolio of 60% stocks and 40% bonds has experienced solid returns, per Morgan Stanley.
However, 2022 has yielded the worst returns in 100 years for this classic strategy, as quoted on MarketWatch. BofA Global calculated the return of this strategy as negative 30% so far this year. BlackRock’s Rieder now calls for a 40/60 division to stay afloat in today’s environment of high inflation, steep rate hikes and heightened geopolitical tensions, as quoted on MarketWatch.
Notably, the S&P 500 is down 24.8% this year (as of Oct 14, 2022). iShares 20+ Year Treasury Bond ETF (TLT - Free Report) has retreated 33.5% this year. Since, the latest inflation reading has come in at market-beating level, we expect more steep rate hikes from the Fed this year. Plus, most developed market central banks have been walking the same path to tame inflation. The benchmark treasury yield reached 4% on Oct 14, 2022.
For the current edgy environment, we have built a portfolio for investors that may come across as safer and high-yielding.
High-Yield Interest-Hedged ETFs – 20%
High-yield interest-hedged ETFs take care of rising rate risks while providing solid current income. This ETF has proven to be pretty resilient in this year’s turmoil.
ProShares High Yield-Interest Rate Hedged ETF (HYHG - Free Report) comprises long positions in USD-denominated high-yield corporate bonds and short positions in U.S. Treasury notes or bonds of approximate equivalent duration. The ETF yields 5.03% annually and is down 7.2% this year.
Convertible Bond ETFs – 10%
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 between the asset and 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.
First Trust SSI Strategic Convertible Securities ETF (FCVT - Free Report) puts at least 80% of its net assets in a diversified portfolio of U.S. and non-U.S. convertible securities. It yields 4.85% annually and charges 95 bps in fees. FCVT has lost 2.2% in the past three months.
Senior Loan ETFs – 10%
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 4.29% annually and charges 66 bps in fees. SNLN is down 7.9% this year.
TIPS ETFs – 10%
TIPS are government bonds whose face value rises with inflation. TIPS ETFs not only combat increasing prices but also protect income for the long term.
iShares 0-5 Year TIPS Bond ETF (STIP - Free Report) yields 3.88% annually and is down 8% this year. The fund charges as low as 3 bps in fees (read: TIPS ETFs to Bet on Higher Inflation).
Short-Term Cash-Like ETFs – 10%
Investors might want to retain money amid the uncertainty. We believe cash and short-dated fixed income may play a greater role in adding stability to a portfolio.
PIMCO Enhanced Short Maturity Active ETF (MINT - Free Report) may be appropriate for non-immediate cash allocations. The fund charges 35 bps, yields 1.17% annually and has lost 3% this year (read: Is Hoarding Cash a Safe Bet Right Now? ETFs in Focus).
Preferred ETFs – 15%
Preferred stock is a type of stock that has characteristics of both stocks and bonds. Like bonds, preferred shares make cash payouts, often at a higher yield than bonds, while offering higher dividend returns and less risk than common stock. Invesco Variable Rate Preferred ETF (VRP - Free Report) yields 5.33% and charges 50 bps.
Dividend-Heavy ETFs – 15%
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) measures the performance of high-dividend-yielding stocks issued by U.S. companies that have a record of consistently paying dividends. It yields 3.65% annually and charges 6 bps in fees. SCHD is down 16% this year.
Consumer Staples Stocks – 10%
This high-quality sector, which is largely defensive, has a low correlation factor with economic cycles. Research shows that consumer staples companies mostly outperform in times of market turbulence. Hence, staples ETF outperformed the S&P 500 Index this year. Consumer Staples ETF (XLP - Free Report) has declined 3% past month against a 6% drop in the S&P 500.