For some investors with a medium- to long-term time horizons, playing it safe is the name of the game, but that task is getting harder in a world awash in depressed or, in some cases, negative interest rates.
Advisors looking to help risk-averse generate adequate income and capital appreciation can turn to model portfolios, including the Strategic Model Portfolios offered by WisdomTree. That group offers three levels of risk tolerance: conservative, moderate, and aggressive. The conservative portfolio tilts heavily to fixed income at 80 percent, potentially making it an ideal strategy for retirees or those close to retirement.
“This model portfolio is designed for investors with mid- to long-range time horizons who are willing to tolerate mild short-term price fluctuations,” according to WisdomTree. “The model portfolio seeks to balance the generation of income with the preservation of capital, and combines both passive and actively managed fixed income ETFs as well as a smaller allocation in U.S. and international equity ETFs. The model portfolio strives to deliver performance in excess of an 80/20 combination of a broad-based U.S. aggregate bond index and a broad-based global equity benchmark.”
Better Bond Ideas
With interest rates low, conservative investors can’t rely on prosaic approaches to U.S. government debt. The aforementioned WisdomTree model portfolio solves for that by featuring the WisdomTree Barclays U.S. Aggregate Bond Enhanced Yield Fund (NYSEArca: AGGY) among its bond holdings.
AGGY seeks to track the price and yield performance, before fees and expenses, of the Bloomberg Barclays U.S. Aggregate Enhanced Yield Index (the “index”). The index is designed to broadly capture the U.S. investment grade, fixed income securities market while seeking to enhance yield within desired risk parameters and constraints.
AGGY uses a“rules-based approach and re-weights the subcomponents of the Bloomberg Barclays U.S. Aggregate Bond Index to enhance yield, while broadly maintaining familiar risk characteristics. AGGY tries to boost return by reweighting the components of the Aggregate Index. But this additional yield is not free as it comes with greater credit risk and rate risk,” according to WisdomTree.
The conservative portfolio also sources yield via a fundamental approach to high-yield debt with the WisdomTree Fundamental U.S. High Yield Corporate Bond Fund (CBOE: WFHY).
WFHY’s underlying benchmark “uses a combination of factors to identify bonds with favorable risk/reward in high yield. Step one of the process is to exclude issuers that do not have publicly traded equities and thus may not report public financials. In our view, these companies are under less scrutiny to manage a healthy balance sheet. This approach has helped our Index avoid nine defaults so far this year,” according to WisdomTree.
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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.
