Transitioning out of the growth phase and into the income phase of your life cycle is a unique event for many investors. Where once you were trying to save and compound your wealth, a shift in primary goals makes generating a sustainable income stream and protecting capital the name of the game.
That change also typically comes with the notion that you aren’t willing to take on as much risk as you once were. Moving from a moderate or aggressive portfolio allocation to a more conservative stance provides peace of mind. That may mean carrying higher levels of cash and fixed-income alongside differing characteristics for your stock exposure.
It’s also worth considering where we are at in the market cycle for both stocks and bonds. That way, you can set realistic expectations for future returns while maintaining the flexibility to make adjustments on the fly.
The following exchange-traded funds represent unique ways to immediately add income, diversification and a sense of direction to your retirement portfolio.
ETFs for the Income-Minded: Vanguard High Dividend Yield ETF (VYM)
Dividend Yield: 3.16%
Expenses: 0.09%, or $9 per every $10,000 invested
Dividend-paying stocks play an important role in a retiree’s overall asset allocation. They contribute meaningful growth and correlation with major domestic indices, as well as consistent equity income.
The Vanguard High Dividend Yield ETF (NYSEARCA:VYM) is a fund I’ve recommended for quite some time. It’s also a position that I own for clients of my wealth management firm.
This passively managed index owns over 400 large and mid-cap U.S. stocks with historically high dividend yields. Top holdings include: Microsoft Corporation (NASDAQ:MSFT), Exxon Mobil Corporation (NYSE:XOM) and Johnson & Johnson (NYSE:JNJ).
VYM offers a current 30-day SEC yield of 3.1%, charges a minimal expense ratio of 0.09% and has $14.50 billion in total assets. Income from this fund is paid quarterly to shareholders.
I think about this position as a well-diversified core holding that can be used as a building block for your stock exposure. It can potentially be paired with international exposure, dividend growth themes or more focused groups such as preferred stocks and real estate investment trusts.
ETFs for the Income-Minded: SPDR DoubleLine Total Return Tactical ETF (TOTL)
Coupon Yield: 3.91%
Expenses: 0.55%*
Those who have followed my missives for some time now know that I am a big fan of active management in the fixed-income space. In my opinion, most passively managed aggregate or intermediate-term bond funds offer far too much exposure to interest rate risk at this juncture. That means if interest rates rise from these historically low levels, the prices of the bonds fall in kind.
One alternative to consider is SPDR DoubleLine Total Return Tactical ETF (NYSEARCA:TOTL), an actively managed ETF helmed by Jeffrey Gundlach of DoubleLine Capital.
The underlying holdings in the TOTL ETF are inclined toward a broad multi-sector approach that will likely be diversified enough for most bond investors. However, the fund manager aims to keep the effective duration lower than the iShares Core U.S. Aggregate Bond ETF (NYSEARCA:AGG). This will likely mitigate relative price fluctuations during a cyclical period of interest rate volatility.
Furthermore, the TOTL portfolio can own sectors not typically represented in AGG, such as emerging-market debt and bank loans. This can enhance the overall yield of the fund and offer a varying total return dynamic as well.
TOTL has an effective duration of 3.82 years, a 30-day SEC yield of 2.8% and charges a net expense ratio of 0.55%. Income is paid monthly to shareholders.
This ETF has qualities that would make it suitable as either a core or tactical opportunity within the bond sleeve of your retirement portfolio.
*Advisory fee waived until Oct. 31, 2016
ETFs for the Income-Minded: Vanguard Short Term Corporate Bond ETF (VCSH)
Dividend Yield: 2.13%
Expenses: 0.1%
If you are looking for a conservative spot to park some of your capital, then the Vanguard Short Term Corporate Bond ETF (NYSEARCA:VCSH) may be an option to consider. This ETF invests in a diversified pool of short-term investment grade U.S. bonds with an effective duration of just 2.8 years.
This may be an appropriate short-term holding spot for money that you want to earn some yield on, but don’t want to have susceptible to wider swings in interest rates. VCSH has a current 30-day SEC yield of 1.73% and charges a net expense ratio of just 0.1%.
This fund has $12.6 billion in total assets and distributes income on a monthly basis to shareholders.
Keep in mind that VCSH is not an alternative to a risk-free money market account where your capital retains its stable value. That is an important distinction many advisors like to overlook or mistake with short-term bond funds.
However, it can be used as a tool to generate a modest income stream with reduced credit and interest rate risk than a typical bond fund.
David Fabian is Managing Partner and Chief Operations Officer of FMD Capital Management. To get more investor insights from FMD Capital, visit their blog. Click here to download David and Michael Fabian’s latest special report, The Strategic Approach to Income Investing.
Learn More: Why I love ETFs, And You Should Too.
