As world wide deleveraging process is in full swing, investors are facing a big dilemma for their retirement investments including 401K investments, IRA investments or taxable investments. On one hand, companies with high growth perspective (such as small companies) are expected to slow down in their earnings growth. With current not too cheap stock market valuation, high growth stocks are losing their appeal in the coming decade. On the other hand, bonds are now offering meager yields. The two traditional portfolio growth assets will not only not do well, they will also subject investors to highly volatile portfolio capital swing.
Companies that pay steady dividends usually have solid cash flows and wide moats in their business. In equity investing, these high quality companies are the only place to be in the coming decade, as advocated by great investors Bill Gross, Jeremy Grantham and others.
We maintain an investment plan called Retirement Income ETFs that consists of 36 funds. These funds enable investors to gain exposure to 5 major assets: US Equity, Foreign Equity, Emerging Market Equity, REITs, Fixed Income.
|LARGE BLEND||VIG||Vanguard Dividend Appreciation ETF|
|LARGE VALUE||DVY||iShares Dow Jones Select Dividend Index|
|LARGE VALUE||SDY||SPDR S&P Dividend|
|MID-CAP VALUE||PEY||PowerShares HighYield Dividend Achievers|
|MISCELLANEOUS SECTOR||PFF||iShares S&P U.S. Preferred Stock Index|
|Foreign Large Value||PID||PowerShares Intl Dividend Achievers|
|Foreign Large Value||IDV||iShares Dow Jones Intl Select Div Idx|
|REAL ESTATE||IYR||iShares Dow Jones US Real Estate|
|REAL ESTATE||ICF||iShares Cohen & Steers Realty Majors|
|Global Real Estate||RWX||SPDR DJ Wilshire Intl Real Estate|
|High Yield Bond||HYG||iShares iBoxx $ High Yield Corporate Bd|
|Long-Term Bond||LQD||iShares iBoxx $ Invest Grade Corp Bond|
|Long-Term Bond||VCLT||Vanguard Long-Term Corp Bond Idx ETF|
|Intermediate-Term Bond||CIU||iShares Barclays Intermediate Credit Bd|
|Intermediate-Term Bond||CORP||PIMCO Investment Grade Corp Bd Index ETF|
|Short-Term Bond||CSJ||iShares Barclays 1-3 Year Credit Bond|
|Short-Term Bond||VCSH||Vanguard Short-Term Corp Bd Idx ETF|
|Intermediate Government||IEI||iShares Barclays 3-7 Year Treasury Bond|
|LONG GOVERNMENT||IEF||iShares Barclays 7-10 Year Treasury|
|SHORT GOVERNMENT||SHY||iShares Barclays 1-3 Year Treasury Bond|
|LONG GOVERNMENT||TLT||iShares Barclays 20+ Year Treas Bond|
|Inflation-Protected Bond||TIP||iShares Barclays TIPS Bond|
|Intermediate-Term Bond||MBB||iShares Barclays MBS Bond|
|Muni National Long||MUB||iShares S&P National Municipal Bond|
|Muni National Short||SHM||SPDR Lehman Short Term Municipal Bond|
|WORLD BOND||BWX||SPDR Lehman Intl Treasury Bond|
|Emerging Markets Bond||EMB||iShares JPMorgan USD Emerg Markets Bond|
|Emerging Markets Bond||PCY||PowerShares Emerging Mkts Sovereign Debt|
|LARGE VALUE||VYM||Vanguard High Dividend Yield Indx ETF|
|DIVERSIFIED EMERGING MKTS||EEM||iShares MSCI Emerging Markets Index|
|LARGE VALUE||FVD||First Trust Value Line Dividend Index|
|WORLD BOND||WIP||SPDR DB Intl Govt Infl-Protected Bond|
|REAL ESTATE||VNQ||Vanguard REIT Index ETF|
|DIVERSIFIED EMERGING MKTS||VWO||Vanguard Emerging Markets Stock ETF|
|DIVERSIFIED EMERGING MKTS||DEM||WisdomTree Emerging Markets Equity Inc|
|Equity Energy||AMJ||JPMorgan Alerian MLP Index ETN|
More detailed breakdown is as follows:
|Asset Class||Number of funds|
|Emerging Market Equity||3|
With these income producing ETFs, two asset allocation portfolios are constructed using asset allocation strategies: strategic and tactical asset allocation strategies (SAA and TAA for participants in Retirement Income ETFs).
Strategic Asset Allocation is based on well known modern portfolio theory and its key features include: diversification, proper fund selection and periodically re-balancing.
Tactical Asset Allocation works on a diversified array of assets provided by funds in a plan and adjusts asset mixes based on market conditions such as asset price momentum utilized by TAA.
The chart and table below show the historical performance of moderate model portfolios employing strategic and tactical asset allocation strategies, compared with SPDR S&P 500 SPY ETF and Vanguard's balanced fund index (MUTF:VBINX)
Portfolio Performance Comparison (as of 12/13/2011)
|Portfolio/Fund Name||1Yr AR||1Yr Sharpe||3Yr AR||3Yr Sharpe||5Yr AR||5Yr Sharpe|
|Retirement Income ETFs Strategic Asset Allocation Moderate||-1%||5%||13%||83%||2%||5%|
|Retirement Income ETFs Tactical Asset Allocation Moderate||3%||14%||9%||72%||8%||54%|
To avoid big losses, tactical asset allocation strategy on these high income producing ETFs have done well. Such a strategy will safeguard a portfolio in various market cycles by rotating to more stable asset classes. This is evident even in the past 12 months, which has seen a wide swing amid government intervention in a fragile economy.
Disclosure: We do not have any business relationship with the company or companies mentioned in this article. It does not set up retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.