Morningstar’s Conservative ETF Porfolio
September 21st, 2011 at 2:00pm by Tom Lydon
Conservative investors in retirement can tap exchange traded funds to build all-ETF portfolios featuring stocks and bonds.
The conservative ETF investor aiming to protect wealth in retirement should limit exposure to equities and rely on the stability offered in bonds, along with other solid yield generating assets, writes Christine Benz, director of personal finance at Moringstar.
The conservative ETF portfolio is suited for retirees and pre-retirees with a 10 to 15 year time horizon, she says.
ETFs are low cost, tax efficient and easy to use investments that allow individuals to take control of their investments.
“The total costs associated with building and holding an all-ETF portfolio may still be lower than maintaining a portfolio consisting of conventional no-load mutual funds,” Benz commented.
The conservative ETF portfolio holds less than a quarter of its assets in equities and the rest in cash, Treasury Inflation-Protected Securities and other bonds.
The portfolio holds separate bond holdings in its core fixed-income positions, including iShares iBoxx $ Investment Grade Corporate Bond (NYSEArca: LQD) at 16% and mortgage-backed iShares Barclays MBS Bond (NYSEArca: MBB) at 10%. These bonds help replicate securities in the total market bond index fund, sans government-bond exposure.
Additionally, the portfolio holds positions in iShares Barclays TIPS Bond (NYSEArca: TIP) at 25%, Vanguard Short-Term Bond ETF (NYSEArca: BSV) at 13%, and a smaller allocation in SPDR DB International Government Inflation-Protected Bond (NYSEArca: WIP) at 4%. TIPS ETFs help protect against any potential rise in inflation levels and the short-term bond ETF helps support any short-term flights to quality.
Equities holdings cover the basic U.S. market-capitalization funds with some international diversification, including the Vanguard Mega Cap 300 Index (NYSEArca: MGC) at 13%, Vanguard Mid-Cap ETF (NYSEArca: VO) at 4%, Vanguard Small-Cap ETF (NYSEArca: VB) at 2%, iShares MSCI EAFE Index (NYSEArca: EFA) at 5% and the Vanguard Emerging Markets ETF (NYSEArca: VWO) at 1%. More conservative investors may lean toward stable companies that focus on dividend growth.
Around 7% should be held in cash or cash equivalents. Cash held should be dependent on spending needs, income generating assets and the size of the overall portfolio. Benz advises holding enough cash to cover two to five years’ worth of living expenses.
For more information on retirement, visit our retirement category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.