Diversified Growth ETFs for a Retirement Portfolio
March 16th, 2014 at 7:02am by Tom Lydon
In any long-term investment portfolio, exchange traded funds that track stocks or other riskier assets will provide investors with a capital growth component, augmenting a portfolio’s overall returns.
For an aggressive ETF portfolio for couples with a 25-year or longer time frame until retirement, Christine Benz, director of personal finance for Morningstar, suggests investors should hold about 60% of a the overall portfolio in riskier, and potentially more lucrative, securities.
This portion provides the “growth engine of the portfolio and also has the longest anticipated holding period,” Benz said. “Therefore, it features heavy equity exposure as well as smaller stakes in volatile, credit-sensitive bond types and commodities. ”
For example, Benz suggests allocating 23.3% to Vanguard Dividend Appreciation ETF (NYSEArca: VIG), 13.3% to Vanguard Total Stock Market ETF (NYSEArca: VTI), 13.3% to Vanguard FTSE All-World ex-US (NYSEArca: VEU), 3.3% to SPDR Barclays High Yield Bond ETF (NYSEArca: JNK), 1.7% to WisdomTree Emerging Markets Local Debt Fund (NYSEArca: ELD) and 5% to PowerShares DB Commodity Index Tracking Fund (NYSEArca: DBC).
The Vanguard Dividend Appreciation ETF is the core position and provides investors with a quality tilt to highly profitable, established companies with a history of raising dividend yields. VIG has a 1.85% 12-month yield and a 0.10% expense ratio.
The Vanguard Total Stock Market ETF covers the entire U.S. stock market, providing investors with a broad exposure to all segments of U.S. equities. Additionally, the fund has a low 0.05% expense ratio.
On the flipside, the Vanguard FTSE All-World ex-US ETF allows investors to access the other 55% of the global market capitalization, including exposure to about 46 developed and emerging market stocks. VEU has a 0.15% expense ratio.
The SPDR Barclays High Yield Bond ETF tracks the speculative grade, high-yield, junk bond market, which has outperformed fixed-income assets due to their stocklike returns. JNK has a 4.11 year duration, 4.89% 30-day SEC yield and a 0.40% expense ratio. [Investors Flocking to High Yield Bond ETFs]
The WisdomTree Emerging Markets Local Debt Fund includes emerging market bond securities denominated in the issuer’s local currency, so the fund is subject to currency risks over the short-term. However, over longer periods, appreciating emerging market currencies have helped bolster returns. ELD has a 4.38 year duration and offers an attractive 5.49% 30-day SEC yield. The ETF comes with a 0.55% expense ratio. [Junk Bond ETFs Gain Traction Despite Risk-Off Environment]
The PowerShares DB Commodity Index Tracking Fund allows investors to access a broad portfolio of commodities, which have been a strong portfolio diversifier due to their low correlation to stocks and bonds. The ETF portfolio includes exposure to aluminum, Brent crude, copper, corn, gold, heating oil, light crude, natural gas, RBOB gasoline, silver, soybeans, sugar, wheat and zinc. DBC has a 0.93% total expense ratio.
For more information on saving toward retirement, visit our retirement category.
Max Chen contributed to this article.
Full disclosure: Tom Lydon’s clients own shares of JNK.
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.