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.