The Passive-Aggressive Investor For 3/2-3/6

Summary

• This week, bond markets outperformed equity markets.
• The core portfolio continues to hold up well thanks to its partial allocation to bonds.
• I introduce a new conservative income-producing portfolio.

Let's begin with the economic and overall technical market backdrop.

• The international economic environment is still under coronavirus strain. Global equity markets are still reeling from the effects.
• The bond market is still the main beneficiary, having caught one of the strongest safety bids in memory. However, some of the charts are going parabolic, indicating we may be entering a peak buying phase.
• The US economy is feeling the effects of the virus, but we only know this through anecdotal data. Last week, it looked like the markets were trying to find a bottom.

Next, let's check on the weekly performance of the ETFs I track for this column:First, the overall numbers probably aren't as bad as you thought going in. The SPDR S&P 500 Trust ETF (SPY) was up modestly, as was the iShares Preferred and Income Securities ETF (PFF). Mid-caps dropped 0.79% while small-caps declined 1.32%. The international dividend ETF was the worst performer, and it was only down 1.76% - not bad considering the headlines over the last few weeks.

Let's take a look at the charts for the sectors, starting with the bonds:All the bond ETFs are in the middle of a solid rally, save for the PFF, which is more equity-like in its performance.All the equity ETFs are trying to consolidate after a sell-off.

Here's the performance table for the model portfolios: Data from Finviz; author's calculations. Green means an increase, while red means a decrease. The first number in the left column is the SPY/VEU percentage, while the second number is the TLT/BNDX percentage. If you're more conservative, opt for the higher TLT/BNDX percentage portfolio. If you're aggressive, reverse the process.

Once again, the overall performance shows the benefit of allocating the portfolio between across broad equity and bond market ETFs. The iShares 20+ Year Treasury Bond ETF (TLT) has had an incredible run over the year; its performance is the reason the US-based portfolio is still doing pretty well, all things considered. International bonds less so. Still, if you chose a 50/50 international balanced portfolio, you wouldn't be off by nearly that much in the month/quarter/and yearly time frames.

Let's look at this data in chart form:

The first pair of columns (blue and orange) shows the 25/75 portfolio; the second pair (grey and yellow) shows the 50/50; the third pair (light blue and green) shows the 75/25. The last column of each series (the dark blue) is the 25x4 portfolio. The first column of each pair shows the SPY/TLT combination's performance; the second pair shows the VEU/BNDX combination's performance.

If you were a conservative US investor, this was your week as the 25/75 TLT portfolio was one clearly "the" top dog. Other US portfolios are also doing well. The international grouping is clearly lagging right now thanks to the virus sell-off. Until that situation is resolved, expect that to continue.

Next, let's turn to the dividend aristocrats portion of the newsletter. Remember that the purpose here is to goose returns by adding solid yielding established companies to a portion of the portfolio.

Top Yielding Aristocrats

• Tanger Factory Outlet Centers (SKT): 12.05%
• Meredith Corp. (MDP): 10.31%
• Helmerich & Payne (HP): 10.29%
• Exxon Mobil (XOM): 7.3%
• Universal Corp. (UVV): 6.14%

Bottom Yielding Aristocrats

• West Pharmaceutical (WST): 0.43%
• Cintas (CTAS): 0.94%
• Ecolab (ECL): 0.97%
• Sherwin-Williams (SHW): 0.99%
• Tootsie Roll (TR): 1.05%

Top Performers

• American States Water Comp (AWR): +14.61%
• Middlesex Water Company (MSEX): +13.69%
• California Water Service Group (CWT): +13.7%
• SJW Group (SJW): 13.32%
• Black Hills Corp. (BKH): 11.75%

Bottom Performers

• Helmerich & Payne (HP): -25.41%
• Meredith Corp. (MDP): -12.41%
• Cullen/Frost (CFR): -12.21%
• Exxon Mobil (XOM): -7.29%
• Eaton Vance (EV): -6.54%

Today, I'm going to introduce the first of two new model portfolios focusing on income. Today's addition will only use ETFs from the list of 11 ETFs that I track; next week's will move outside that list to gain more yield.

Before we look at this portfolio, let's take a step back to get a better understanding of our operating environment. We are in a low-rate world. Central bankers across the world are discussing how r* (the hypothetical interest rate which is neither restrictive nor stimulative of economic growth) has been trending lower for the last 40 years and how, due to an aging population, slow population growth, and low inflation, it will remain low for some time. This is obviously constraining their policy-making ability.

From a practical perspective, it means that asset yields will be lower. So, if we're going to play it safe, we need to accept that the portfolio's yields will be low and that to gain additional yield, we'll have to increase our risk.

That being said, let's look at the 11 ETFs that I track:

The central theme to all of these ETFs is that they're all "haystacks" instead of "needles" - each ETF tracks an incredibly wide swath of a particular market, usually at low cost. Remember - we're not trying to outsmart the market, which data says is extremely difficult on an annual basis and practically impossible over multiple years. Instead, we're looking to ride the market and (hopefully) minimize some of the volatility.

In looking at the above list, I'm going to scratch the bottom five performers - the TLT, iShares 7-10 Year Treasury Bond ETF (IEF), SPY, iShares Core S&P MidCap ETF (IJH), and iShares Russell 2000 ETF (IWM). While they all generate some income, the income is a bit low, even given the current rate environment.

Next, there are only two broad bond market ETFs - the Vanguard Total Bond Market ETF (BND) and the Vanguard Total International Bond ETF (BNDX). Since this is an income portfolio, we should assume that some bond component is essential. Let's take both at 25%. As I mentioned when I started this column, I love preferred shares, so we'll add in the PFFs at 25% Of the remaining dividend ETFs, we have an international and domestic ETF. Let's add 25% of each to the portfolio, and then compare the results:

From Portfolio Visualizer; please click for a larger image; data from 1/14-2/20

The US portfolio has a better compound growth rate for the last six years and a lower standard deviation (risk). It also has a higher risk-adjusted return (the Sharpe ratio). Overall, the US market has performed better relative to the international markets over the last 6 years, which explains why that's the security we'll choose for now. Using the numbers from Friday's close and a simple 25%/ETF allocation, the portfolio has a yield of 3.57% with a standard deviation of 3.84%.

Remember - this is a conservative income portfolio. The primary purpose is throwing off income while keeping volatility low. If you want higher returns, it's not for you.

Next week, I'll be looking at a more aggressive income-producing ETF portfolio.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: I don't have a relationship with any reader. This is not specific advice for anyone. Please read other authors and analysts who disagree with me. In other words - Buyer Beware.

Comments

[6264541]

Hale,

Building on your bnd,bndx,pff, and vym portfolio (port1), I tried a bnd,bnc,ief, and splv (equal weighted) portfolio (port2)
https://bit.ly/39MvkuV. It has all years with positive returns, better spread between upside capture and downside capture,

port 1 port2

Upside Capture Ratio (%) 23.85 33.76
Downside Capture Ratio (%) -5.48 17.82

It also has better performance in recent downturn using etfreplay backtesting.

Jeff

[Hale Stewart]

Nice!