3 ETFs For Income-Minded Retirees
David Fabian | Aug 14, 2016 01:01AM ET
Transitioning out of the growth phase and into the income phase of your life cycle is a unique event for many investors. Where once you were trying to save and compound your wealth, primary goals shift to generating a sustainable income stream and protecting capital.
That change also typically comes with the notion that you aren’t willing to take on as much risk as you once were. Moving from a moderate or aggressive portfolio allocation to a more conservative stance provides peace of mind. That may mean carrying higher levels of cash and fixed-income alongside differing characteristics for your stock exposure.
It’s also worth considering where we are at in the market cycle for both stocks and bonds. Setting realistic expectations for future returns alongside the flexibility to make adjustments as conditions change.
The following ETFs represent unique ways to immediately add income, diversification, and a sense of direction to your retirement portfolio.
h3 Vanguard High Dividend Yield (NYSE:VYM)/h3Dividend paying stocks play an important role in a retiree’s overall asset allocation. They contribute meaningful growth and correlation with major domestic indexes, as well as consistent equity income.
VYM is my favorite vehicle for this opportunity and has been one that I have recommended for quite some time . It’s also a position that I own for clients of my wealth management firm.
This passively managed index owns over 400 large and mid-cap U.S. stocks with historically high dividend yields. Top holdings include: Microsoft Corp (NASDAQ:MSFT), Exxon Mobil (NYSE:XOM), and Johnson & Johnson (NYSE:JNJ).
VYM offers a current 30-day SEC yield of 3.10%, charges a minimal expense ratio of 0.09%, and has $14.50 billion in total assets. Income from this fund is paid quarterly to shareholders.
I think about this position as a well-diversified core holding that can be used as a building block for your stock exposure. It can potentially be paired with international exposure, dividend growth themes, or more focused groups such as preferred stocks and REITs.
h3 SPDR DoubleLine Total Return Tactical (NYSE:TOTL)/h3Those who have followed my missives for some time now know that I am a big fan of active management in the fixed-income space. In my opinion, most passively managed aggregate or intermediate-term bond funds offer far too much exposure to interest rate risk at this juncture. That means if interest rates rise from this historically low levels, the prices of the bonds fall in kind.
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One alternative to consider is TOTL, an actively managed ETF helmed by Jeffrey Gundlach of DoubleLine Capital.
The underlying holdings in TOTL are inclined towards a broad multi-sector approach that will likely be diversified enough for most bond investors. However, the fund manager aims to keep the effective duration lower than the iShares Core US Aggregate Bond (NYSE:AGG). This will likely mitigate relative price fluctuations during a cyclical period of interest rate volatility .
Furthermore, the TOTL portfolio can own sectors not typically represented in AGG such as emerging market debt and bank loans. This can enhance the overall yield of the fund and offer a varying total return dynamic as well.
TOTL has an effective duration of 3.82 years, a 30-day SEC yield of 2.80%, and charges a net expense ratio of 0.55%. Income is paid monthly to shareholders.
This ETF has qualities that would make it suitable as either a core or tactical opportunity within the bond sleeve of your retirement portfolio.
h3 Vanguard Short-Term Government Bond (NASDAQ:VGSH)/h3If you are looking for a conservative spot to park some of your capital , then VCSH may be an option to consider. This ETF invests in a diversified pool of short-term investment grade U.S. bonds with an effective duration of just 2.80 years.
This may be an appropriate short-term holding spot for money that you want to earn some yield on, but don’t want to have susceptible to wider swings in interest rates. VCSH has a current 30-day SEC yield of 1.73% and charges a net expense ratio of just 0.10%.
This fund has $12.6 billion in total assets and distributes income on a monthly basis to shareholders.
Keep in mind that VCSH is not an alternative to a risk-free money market account where your capital retains its stable value. That is an important distinction many advisors like to overlook or mistake with short-term bond funds.
However, it can be used as a tool to generate a modest income stream with reduced credit and interest rate risk than a typical bond fund.
Disclosure : FMD Capital Management, its executives, and/or its clients June hold positions in the ETFs, mutual funds or any investment asset mentioned in this article. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities.
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