My specialties involve economic and market data and developments and in turn the best individual securities from the stock, bond and other markets to capitalize on those developments for safer growth and income. This is what I showcase in my Profitable Investing — now in its thirtieth year of publication.
However, I understand the needs and wants for funds including exchange-traded funds (ETFs) by individual investors. It may be that portfolios are in smaller sums or are part of administered qualified retirement accounts including IRAs, 401k’s, 403b’s and SEP’s. And many of these accounts are domiciled in the major fund companies. The Vanguard Group is one of the largest fund management companies, with over $5 trillion in assets under management (AUM). And in the U.S. market it is one of the leaders in providing individual investors a wide array of funds, including ETFs.
Inside the model portfolios of Profitable Investing I have a collection of model mutual fund portfolios, including three which are specific to funds of individual fund families including Fidelity, T. Rowe Price and Vanguard. I do this to specifically guide subscribers who want or need to stay domiciled in fund families.
And in all of the mutual fund portfolios, I provide an allocation to specific funds which seeks to match up to the main portfolio of individual securities in allocations and strategies.
Let me now show you how I line up the funds of Vanguard for a better portfolio.
Stocks, Fixed Income & Cash
To start, I have a current allocation of 56% in stocks, 44% in fixed income and included in that 44% is 11% in cash. I know that this allocation is less than many 60/40 stocks to bonds than is typical of asset allocations for many managers. But I have been a bit more conservative of late given many of the challenges to the financial markets, as well as the opportunities in the bond markets for not just income, but growth as well.
I’ll start with the stock allocations. My continued judgement is that the U.S. remains the prime market of the globe. Europe and Asia continue to have slower growth including some borderline recessionary conditions. And Latin America and Africa have a bevy of highly challenging problems.
So, my allocations are highly focused on the U.S. markets right now. This is different from my decades of being focused more on global markets, as I was in banking and asset management.
General US Stocks
VYM and S&P 500 Index Total Return Source Bloomberg
That said, the starting point for Vanguard is the Vanguard High Dividend Yield ETF (NYSEARCA:VYM). This is an indexed ETF which is focused on U.S.-listed stocks which pay higher average dividends, nearly all in the U.S. market. This is my more measured approach to the S&P 500 Index, as the higher weightings on dividends provides a lesser risk to downturns as well as volatility.
You’ll note that over the past 10 years, the Vanguard ETF has generally provided more consistent total return including dividend income. And in 2018 during the severe downturn in the S&P 500 Index, the Vanguard ETF held up much better. But for 2019, with a drive towards more aggressive stocks (particularly in the technology sector), it has lagged. But my view is that I want to achieve a lower volatility and lower risk return over time.
VNQ and S&P 500 Index Total Return Source Bloomberg
Next in the stock allocation is real estate investment trusts (REITs). This is done with the Vanguard Real Estate ETF (NYSEARCA:VNQ). REITs continue to benefit from a growing U.S. economy fueling property demand and better rental income. And with low inflation, funding costs are reduced for overall improving profitability.
REITs continue to provide more lower-risk growth as they are mainly focused on U.S.-centric assets away from the global economic challenges. And as noted above, low inflation and strong-to-rising revenues feeds more valuable dividend income.
For the trailing 12 months, the Vanguard REIT ETF has returned 16.56% outpacing the S&P 500 Index on a very consistent basis — especially during some of the selloffs in late spring and later summer.
And with a dividend yield of 3.25%, the ETF out pays the S&P 500 by a significant margin. With consistency based on real assets and defended dividend income, REITs in this ETF are a great way to achieve measured growth with higher income.
VPU and S&P 500 Index Total Return Source Bloomberg
Then I move to another defensive source for growth and income in the U.S. market with utilities. And this is done with the Vanguard Utilities ETF (NYSEARCA:VPU). Like for REITs, U.S. utilities are insulated from global woes. They continue to capitalize on the growing U.S. economy, including lower inflation.
The best utilities are combinations of regulated local services and unregulated wholesale businesses. The combination of dependable revenues and profit margins plus added growth and income from unregulated operations makes for a great way to generate steady-to-rising income and dividends with growth over time.
The return for VPU for the trailing year is a positive 14.42%, which had been consistently outperforming the S&P 500 Index. But into this month, there has been some market activity placing bets for more growth from more aggressive market sectors at the cost of more defensive sectors such as utilities. I see this as a mistake which may well place investors at a higher level of risk — and perhaps peril.
VGT and S&P 500 Index Total Return Source Bloomberg
Now I come to the exciting part of the U.S. market in information technology. Technology is a big growth engine for the U.S. economy, and tech stocks reflect optimism for higher returns. I accomplish this allocation with the Vanguard Information Technology ETF (NYSEARCA:VGT).
Technology is the alchemy of the market. Whether products come from silicon or the ether in the minds of app and software developers, profits can be achieved in momentous amounts. But not all of them work, and there are always new products and services. This makes for volatile markets.
So, while investors need exposure, it should be done as part of a broader portfolio.
The technology market has been a good one, and VGT has turned in a return over just the past five years alone of over 138% — outpacing the S&P 500 two-to-one. But note the fourth quarter of 2018, as this charged segment comes with drops along the way.
Fixed Income: Corporate Bonds
VCIT and Bloomberg Barclays US Aggregate Index Total Return Source Bloomberg & Barclays
Fixed income in the U.S. continues to be very good. The U.S. has very low inflation with little threat for some time to follow. This has led to lower yields and higher bond prices overall. But there are two sectors which I continue to advocate for investors in corporate bonds and municipal bonds.
Corporate bonds continue to benefit from the growing economy. It’s aiding credit conditions of businesses and bolstering their bond prices. And until recently, issuance has been slower — aiding supply and demand for higher prices.
My allocation to this market is in the Vanguard Intermediate-Term Corporate Bond ETF (NASDAQ:VCIT). This ETF has returned 16.25% over the trailing three years. That significantly outpaces the general U.S. bond market as tracked by the Bloomberg Barclays US Aggregate Index.
Fixed Income: Municipal Bonds
VTEB and Bloomberg Barclays US Aggregate Index Total Return Source Bloomberg & Barclays
Then for municipal bonds, I have the Vanguard Tax-Exempt Bond ETF (NYSEARCA:VTEB). Municipal bonds have been gaining like corporates on the growing economy. Tax revenues are up, aiding credit of issuers. Low inflation also aids bonds. And issuance has been muted. Many issuers have not had the need or the political will to sell more bonds. Add in stronger demand by individual investors needing or wanting more tax-exempt income aided by limits on state and local income tax (SALT) deductions as part of the 2017 Tax Cuts & Jobs Act (TCJA), and munis are ever mightier.
VTEB continues to outperform the U.S. Aggregate Bond Index done by Bloomberg Barclays over the past trailing three years, with a return of 13.18%.
And note, even if you invest in qualified investment accounts, I still recommend the tax-free ETF for total return and not just for tax-free income.
Now, that I have outlined my allocations to ETFs from Vanguard for safer growth and income, perhaps you might take a look at Profitable Investing. And for more income ideas, take a look at my recently published book, Income for Life, which covers sixty-five income streams in nearly 400 pages that anyone can get. And I’ve written them all up in a simple and engaging way that are easy to understand and follow.
For more information on my book, Income for Life, click here. It lays out income-producing investment strategies for all economic conditions, as well as additional income producing ideas that anyone can use successfully.
Neil George was once an all-star bond trader, but now he works morning and night to steer readers away from traps — and into safe, top-performing income investments. Neil’s new income program is a cash-generating machine…one that can help you collect $208 every day the market’s open. Neil does not have any holdings in the securities mentioned above.