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.
Top nations include Japan and United Kingdom while France, Germany and Switzerland round out the top five for this well-diversified fund. The fund has AUM of $2.35 billion and average daily volume of roughly 1.5 million shares. It charges 39 bps in annual fees and has added 15.3% so far this year (as of April 13, 2015). The fund has a Zacks ETF Rank #2 (Buy) with a low risk outlook.
Schwab U.S. Aggregate Bond ETF (SCHZ)
For a balanced bond portfolio, retirees can consider this ETF as it is spread across the yield curve. With the prospect of hike in key Fed rates this year, short-term bonds and the related ETFs might fall out of investors’ favor. On other hand, long-term bonds remain extremely vulnerable to rising rate risks. So, to bridge the two risks, a balanced approach is needed to ensure first a decent regular income and then capital appreciation.
Moreover, this ETF displays the performance of the U.S. investment grade bonds, indicating minimal default risks. Government bonds account for over 40% of the basket followed by securitized product (28.4%), corporate (21.5%) and cash (8.1%).
The ETF follows the Barclays Capital U.S. Aggregate Bond Index, charging a minimal 6 bps in annual fees from investors. With AUM of $1.5 billion, the fund holds 2,358 top-rated bonds. Volume is good as it exchanges nearly 200,000 shares a day.
The product has a modified adjusted duration of 5.2 years and average maturity of 7.1 years. In terms of yield, the ETF pays out 2.02% in dividend. SCHZ is up 1.5% so far this year while it returned 8.6% over the last three-year period (as of April 13, 2015).
BulletShares 2020 Corporate Bond ETF (BSCK)
Thanks to rock-bottom interest rates of government-backed bonds which offer safe-haven opportunities, the U.S. corporate bond market has been on a solid path as these normally yield more than their treasury cousins. Improving corporate earnings also makes investing in corporate bonds sensible.
This fund looks to track the BulletShares USD Corporate Bond 2020 Index which is designed to represent the performance of a held-to-maturity portfolio of the U.S. dollar-denominated investment-grade corporate bonds with effective maturities in the year 2020. The $282.6 million-fund charges an expense ratio of 25%.
The 188-holding ETF targets the intermediate part of the yield curve with a weighted average maturity of 5.50 years. It is subject to moderate levels of interest rate risk as denoted by an effective duration of 4.75 years. With no security accounting for more than 1.84%, the fund has low concentration risks. BSCK is up 2.44% so far this year and yields 2.50% (as of April 13, 2015).
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