In an era of rock-bottom interest rates, retirement has become a lavish idea for many investors across the developed world. Earlier, people used to follow a rule of thumb for asset allocation between stocks and bonds, which said that the stock part of one’s portfolio should equal 100 minus the retiree’s age.
For example, if some investor retires at 60, 40% of his total savings should go to stocks and the rest in bonds. That way, investors can protect themselves from any wild stock market movement, yet be able to reap maximum benefits. However, with the changing economic dynamics, even retirees now appear to incline toward a stock-heavy portfolio.
Bloomberg noted a Morningstar data which says that at 2014 end, equity shares in 54 target funds meant for people retiring in 2015 hovered around 8% to 68%. Definitely, allocations are ‘demand-based’, but as high as 68% allocation to equity suggests retirees’ growing apprehension over bonds thanks to rock-bottom rates, in most part of the world, which pares down the regular current income.
So what is needed is a balanced retirement portfolio made of stocks and bonds so that steady current income can be availed of in a safe manner. Below we highlight a few ETFs which could be considered in a retirement portfolio with a long-term focus. Let’s assume that each ETF will hold 20% share of the total.
PowerShares International Dividend Achievers ETF (PID)
Eyeing dividend ETFs, when considering a stock-based ETF for retirement portfolio, is an intriguing idea as dividends ensure steady income. Within the dividend space, honing in on the ‘dividend aristocrats’ could be the most beneficial way to ward off the risks resulting from market volatility. This technique looks upon the fundamental strength of the dividend payers. Dividend Aristocrats are the blue-chip dividend-paying companies, which have a long history of hiking dividend payments year over year.
To do so, investors could easily plant their money in PID. This product tracks the International Dividend Achievers Index which follows companies that have increased their annual dividend for five or more consecutive years.
Notably, investors’ enthusiasm in international dividend investing is going through the roof presently thanks to a flurry of easy money across the globe. American securities account for one-fourth of the total, taking the top position among countries. U.K. (20%) and Canada (13.6%) take next two spots.
The $1.54 billion-ETF charges investors 54 basis points a year. The fund is tilted toward Energy (33.5%) and Financials (15.2%). The product has a moderate dividend yield of about 2.7%, but looks to be a safer bet given its focus on securities with consistent dividend growth. The fund holds 87 stocks in total while no stock accounts for more than 4.35% of the total.
So far this year (as of April 13, 2015), PID is up 3.8%. The fund generated 44% in the last five years despite the Euro zone debt crisis. Thus, with many developed nations opting for aggressive policy easing, we can expect even bigger returns in the years ahead.
First Trust Dorsey Wright Focus 5 ETF (FV)
Securities with high relative strength scores (strong momentum) are given higher weights. The fund charges 94 bps in fees for this smart exposure. This $2.84 billion ETF is up over 10% this
year and added about 35% in the last one year (as of April 13, 2015).
iShares Currency Hedged MSCI EAFE ETF (HEFA)
For a broad foreign market play without currency risks, thanks to the policy differential between the U.S. and the rest of the developed world, investors could also consider HEFA which focuses on the EAFE region — Europe, Australasia, Far East — for exposure. This product follows the MSCI EAFE 100% Hedged to USD index and is basically a holding of EFA with currency hedged tacked on. Financials dominates the fund’s return with one-fourth share while consumer discretionary, industrials, health care and consumer staples also get double-digit allocation.