There are two portfolios I monitor regularly here on Seeking Alpha, one for dividend income stocks (The Team Alpha Retirement Portfolio) and the other for aggressive growth (The Young and Restless Retirement Portfolio). I am often asked about a simple retirement portfolio that would take far less monitoring, while still offering a decent income.
I have identified 5 ETFs which I feel could offer a balanced approach to total investment management, easily monitored, and a fair income stream. While these investments do not have the high rate of returns as our two portfolios, they do offer a more financially secure future (and present) for those of us who are willing to make the trade off of higher returns for less "work".
Here are the 5 I believe could work fairly well: First Trust DJ Global Select Dividend (FGD), SPDR DJ Wilshire Intl Real Estate (RWX), WisdomTree DEFA High Yielding Equity Income (DTH), SPDR Barclays Long Term Corporate Bond (LWC), iShares S&P US Preferred Stock (PFF).
We all reach a point in our investing lives that the desire to work hard in managing our finances becomes less, and the actual work becomes more difficult. While I do not place any specific age to this natural transition, suffice it to say that as human beings, we each have our limits. Knowing what those limits are is a wonderful reflection on how we have been able to manage our financial security for so many years as it is.
The 5 ETFs I Have Picked
I realize that there are plenty of choices. As a matter of fact, the choices of ETFs seem to grow every day. Here is a brief look at their rapid growth:
The five that I selected are probably not perfect for everyone, but if I had to pick any for my own family, I would select these.
FGD: Price: $24.75/share, Yield: 4.95%, Focus: Global Equity Dividend Income.
- Expense ratio of .59%
- Price to book value of only 1.48, which is more than .25 less than the asset class median of 1.73.
- 50% Europe equities, 25% Asia equities, 25% North American equities. Yes, Europe has a higher weighting but right now it is cheap!
- Equities are held across all major market sectors. Telecommunications, financial, industrials, and utilities being the favorites.
- The "share" price reached a high of over $35.00 prior to the great recession, and could offer some capital appreciation as the global economy recovers.
This ETF has been selected because i like the global diversification and exposure to market sectors that have shown capital appreciation, as well as strong dividend yields.
RWX: Price: $42.20/share, Yield: 6.55%, Focus: International Real Estate.
- Expense ratio of .58%.
- A low Beta of only 1.01.
- Roughly 70% of outstanding shares are held by institutions.
- Prior to the great recession the "share" price was over $70.00.
- A mixture of REITs as well as real estate stocks, gives this ETF a nice bump in overall yield.
This ETF has been selected for the global recovery in real estate. I like the mix of REITs for the mortgage blend on the financial side, as well as the pure real estate plays in both the commercial and residential markets.
DTH: Price: $42.19/share, Yield: 4.10%, Focus: International Dividend Stocks Excluding the USA.
- An international ETF, which focuses on dividend paying stocks outside of the USA, gives greater global exposure to passive investors.
- Expense ratio of .57%.
- 43% of outstanding shares are institutionally held.
- Price to book value of only 1.36.
- Prior to the great recession, the "share" price topped $75.00.
An ETF that focuses on international dividend stocks is a contrarian play that allows investors to "buy low". The stocks held have been beaten down by the global slowdown and offer extremely attractive entry points. This ETF allows for a broad diversification with a sound yield at a reasonable price.
LWC: Price: $40.16/share, Yield: 4.60%, Focus: Individual U.S. Corporate Bonds.
- A fixed income option for broader diversification. Corporate bonds are not in that government bond "bubble" scenario, and can offer stability for the passive investor.
- Expense ratio of just .15%
- Extremely low volatility.
- 50% of outstanding shares are institutionally held.
- The long term rates are very attractive in this ETF for a steady income stream.
An ETF that has a well balanced portfolio of better yielding longer term corporate bonds, offers investors a solid allocation of bond holdings, without the lower yielding Government bonds. Corporate bonds of this nature can not only pay steady rates of return, but as the earnings grow, and the economy recovers, could potentially have some capital appreciation as well.
PFF: Price: $40.27/share, Yield: 5.99%, Focus: U.S. Preferred Stocks In the Financial Sector.
- The financial sector is perhaps the most powerful sector in a growing economy.
- Monthly dividends might fluctuate but has maintained a very high rate of return.
- 1/3 of all outstanding shares are institutionally held.
- Expense ratio of .47%
- Preferred stocks are less volatile and have reduced risks.
This ETF is one of my favorites because of the diversification in the financial sector with preferred stock holdings. A relatively stable income stream is perfect for income seeking investors who also believe that the entire financial sector will continue to improve and grow.
The world of ETFs has plenty of great options, and the ones I selected could give a passive investor an overall yield of roughly 5.24% if equal dollar amounts are allocated in each ETF. Keep in mind that the yields also contain capital distributions, but most of the yields are dividend generated.
The Future Of ETFs
It is not difficult for me to recognize that this investment product is becoming a favorite of individual investors, as well as institutions. As a matter of fact, institutional holdings have risen steadily in the last 10 year, almost dramatically.
This chart shows the investor breakdown as of the end of 2011. As the institutions move away from mutual funds, and into ETFs I believe that the ETF class of investments will grow, become even more stable, and could drive the "share" prices higher.
More than double the ownership in just 10 years. That is pretty impressive since the actual number of ETFs has climbed from a mere 81 choices in 2000, to nearly 1200 in 2012. (See chart above)
As more ETF choices are made available, I can see that they are desirable investment products with a solid future. Actively managed or passively managed ETFs (that track indexes), will more than likely become more attractive than mutual funds eventually. Even the larger brokerage houses have to see the enormous cost savings on their end, especially with the less actively managed ETFs, with far less overhead costs, and perhaps even greater profit potential just by the fact that most of the ETFs have a per trade charge, just like stocks.
Mutual funds are generally at no cost (or just front or back loaded) and are much less apt to be "traded". (Brokerage houses HATE when investors jump in and out of mutual funds, and most charge a hefty fee for doing that, as well as heavy restrictions on how often investors can make a "round trip")
The future of ETFs seems very bright indeed.
The Bottom Line
I am not prepared to hang up my portfolio management hat right now, and individual stocks offer investors the ultimate flexibility and potential. In every metric, individual stocks will outperform both mutual funds and ETFs.
That being said, ETFs are a prudent investment for folks who have reached a point where the job of portfolio management has become too difficult to handle. As far as I am concerned, investing in ETFs offer more bang for the buck than any other investment outside of individual securities.
Please make certain that you do your own research and due diligence prior to making any investment decision. These are my opinions and not a recommendation to buy or sell any security or investment product.
Disclosure: I am long PFF.