Four Fixed-Income ETFs for Your Retirement Portfolio

March 15th at 7:01am by Tom Lydon

When building a retirement nest egg, people will typically set aside a portion of their portfolios for conservative, fixed-income allocations. With exchange traded funds, investors can customize bond holdings as they see fit.

For example, in an aggressive ETF portfolio for couples with a 25-year or longer time frame until retirement, investors should have about 32% of their portfolio allocated toward plain-vanilla, short-term bond funds to serve as reserves in case the liquid cash portion of a portfolio is depleted, writes Christine Benz, director of personal finance for Morningstar. [Ultra-Short-Term Bond ETFs as Cash Alternatives]

Benz suggests including a 6.7% allocation to Vanguard Short-Term Bond ETF (NYSEArca: BSV), 13.3% to PIMCO Total Return ETF (NYSEArca: BOND), 6.7% to Vanguard Short-Term Inflation-Protected Securities ETF (NYSEArca: VTIP) and 5.3% to Vanguard Dividend Appreciation ETF (NYSEArca: VIG) in this portion of a diversified investment portfolio. [ETF Chart of the Day: Bond Bash]

Investors will note the larger allocation to PIMCO Total Return ETF, which is considered a core component of the fixed-income position.

“As so-called ‘core-plus’ products… they have the latitude to venture beyond the securities in the Barclays Aggregate Bond Index and take small positions in emerging markets and high-yield bonds,” Benz said. “They can also position duration (a measure of interest-rate sensitivity) differently from the index.”

Unlike traditional beta index-based ETFs, BOND is actively managed and is comprised of securities that the manager, in this case Bill Gross, believes will maximize returns. The ETF includes U.S. government, mortgage, and credit bonds, along with non U.S. developed and emerging market debt. The ETF has a 5.65 year duration, 1.59% 30-day SEC yield and a 0.55% expense ratio.

The Vanguard Short-Term Bond ETF is considered a safe fixed-income holding as its short duration of 2.65 years helps limit the negative effects of rising interest rates. However, due to the conservative nature of the fund, BSV only comes with a 0.76% 30-day SEC yield. The fund also comes at a low 0.10% expense ratio.

The Vanguard Short-term Inflation-Protected Securities ETF helps mitigate two negative factors that weigh on bonds: interest rate risk and inflation risk. VTIP has a 1.8 year duration, -1.37% 30-day SEC yield and a 0.10% expense ratio. SEC yields can dip into negative territory as it is equal to the Treasury bond yield minus the rate of expected inflation. Consequently, investors can think of it as a premium people are willing to pay for inflation protection.

Lastly, the Vanguard Dividend Appreciation Index ETF, while not a fixed-income security, provides exposure to quality dividend stocks that have raised their annual dividends for at least 10 years in a row. The companies typically include large, established firms with low financial leverage and steady earnings. VIG has a 1.85% 12-month yield and a 0.10% expense ratio. [Dividend Growth Via ETFs]

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 BOND.

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.