Retirement Income Portfolio Building Using ETFs and Asset Allocation Strategies
11/12/2010 0 comments
Building a steady and safe income producing portfolio is paramount to retirees. High yield stocks, preferred stocks, convertibles and bonds are the basic building blocks for such portfolios. Research results indicate that blue chip stocks with high dividends, unlike highly volatile and low dividend or no dividend stocks (such as many high tech stocks and small company stocks), have produced comparable or even slightly higher returns with less risk in long term.
In this article, we present a high income investment plan (Retirement Income ETFs) that is based on asset allocation strategies. Both MyPlanIQ Strategic Asset Allocation (SAA) and Tactical Asset Allocation (TAA) strategies are used to construct model portfolios.
This plan is designed for income producing purpose: high dividend (yield) stock ETFs are chosen for both US stocks and international stocks asset classes. We have decided to use general emerging market stocks ETFs (EEM or VWO) instead of some thinly traded high dividend emerging market stock ETFs. This situation will be changed once the high yield emerging market stock ETFs become more liquid and tradable.
The plan uses 34 ETFs that represent the following five key asset classes:
U.S. stocks: VIG, DVY, SDY, FVD, VYM, PEY, PFF
International stocks: PID, IDV
Emerging market stocks: EEM, VWO
Real Estate Investment Trusts (REITs): IYR, ICF, VNQ, RWX
Fixed Income:
- US Fixed Income: HYG, LQD, VCLT, CIU, CORP, CSJ, VCSH, IEI, IEF, SHY, TLT, TIP, MBB, MUB, SHM
- International Fixed Income: BWX, EMB, PCY, WIP
Notice that preferred stocks PFF is classified under U.S. stocks.
We compared the back tested performances of the SAA and TAA moderate model portfolios with the corresponding SIB (Simpler Is Better) five core asset ETF portfolios. As of 11/9/2010, the performance is:
Performance table (as of Nov 10, 2010)
| Portfolio Name | 1Yr AR | 1Yr Sharpe | 3Yr AR | 3Yr Sharpe | 5Yr AR | 5Yr Sharpe |
|---|---|---|---|---|---|---|
| Retirement Income ETFs Tactical Asset Allocation Moderate | 16% | 105% | 8% | 57% | 12% | 84% |
| Retirement Income ETFs Strategic Asset Allocation Moderate | 14% | 108% | 1% | 5% | 6% | 28% |
| Five Core Asset Index ETF Funds Tactical Asset Allocation Moderate | 15% | 105% | 8% | 57% | 16% | 106% |
| Five Core Asset Index ETF Funds Strategic Asset Allocation Moderate | 19% | 146% | 4% | 16% | 10% | 42% |
From the above chart, one can see that since the portfolio inception (12/31/2000),the Retirement Income ETFs Strategic Asset Allocation Moderate has outperformed its corresponding Five Core Asset Index ETF Funds Strategic Asset Allocation Moderate while in the meantime, the Retirement Income ETFs Tactical Asset Allocation Moderate has outperformed its corresponding Five Core Asset Index ETF Funds Tactical Asset Allocation Moderate. In fact, in the past ten years, the Retirement Income portfolios had lower standard deviation than the Five Core SIB. Please visit the corresponding portfolios for more detailed performance information.
Currently, the SAA Moderate Portfolio has the following holdings and yields:
| Asset | ETFs | Allocation | Yield |
| REAL ESTATE | ICF (iShares Cohen & Steers Realty Majors) | 11.96% | 2.88% |
| FIXED INCOME | LQD (iShares iBoxx $ Invest Grade Corp Bond) | 18.40% | 4.80% |
| Emerging Market | VWO (Vanguard Emerging Markets Stock ETF) | 13.31% | 1.20% |
| US EQUITY | DVY (iShares Dow Jones Select Dividend Index) | 5.92% | 3.53% |
| US EQUITY | PEY (PowerShares HighYield Dividend Achievers) | 4.87% | 4.28% |
| INTERNATIONAL EQUITY | IDV (iShares Dow Jones Intl Select Div Idx) | 16.50% | 4.25% |
| High Yield Bond | HYG (iShares iBoxx $ High Yield Corporate Bd) | 16.47% | 8.40% |
| INTERNATIONAL BONDS | BWX (SPDR Lehman Intl Treasury Bond) | 12.57% | 0.70% |
| Total Yield | 4% |
Compared with current sub-zero interests in a cash account, the above portfolio's yield is very attractive.
In conclusions, using effective asset allocation strategies (especially the tactical asset allocation strategy), one can build an income producing portfolio that is less risky and achieve higher returns. Retirees or anyone who needs supplemental income can benefit from learning more on these investment plans.
labels:investment,
Symbols:VIG,DVY,SDY,FVD,VYM,PEY,PFF,SPY,IWM,PID,IDV,EFA,VEU,EEM,VWO,IYR,ICF,VNQ,RWX,HYG,LQD,VCLT,CIU,CORP,CSJ,VCSH,IEI,IEF,SHY,TLT,TIP,MBB,MUB,SHM,AGG,BND,BWX,EMB,PCY,WIP,
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