Good Ol’ Bonds
Beyond dividend payers, Thomas also suggests mixing in REIT ETFs as an alternative to long-term bonds. Generally speaking, the rising rate environment isn’t all that great for long-term debt, he says. Still, consider sticking with some traditional classics while mixing duration exposures to mitigate interest rate risk.
His picks on the fixed-income side are straightforward: the $56 billion iShares Core U.S. Aggregate Bond ETF (AGG) and the $1.4 billion iShares 0-5 Year Investment Grade Corporate Bond ETF (SLQD), which owns corporates with zero- to five-year remaining maturity.
“In retirement, you can’t focus on average returns anymore. You have to focus on protecting on the downside and getting enough upside to generate your income needs,” Thomas said. “You can get good returns with more reasonable diversification, and really lower your overall risk in the portfolio.”
“You’ve got to temper your enthusiasm on whether your portfolio is a matchup with the S&P 500,” he added. “If you’re doing as well as the S&P 500 in retirement, then you’re taking too much risk.”
Target Downside Mgmt With Real Assets
One big concern facing retirees is the possibility of inflation and its erosive impact on capital. One way to try and manage inflation risk is through “durable” and “real” assets. David Schassler, head of VanEck’s portfolio and risk solutions group and portfolio manager, makes a concise case for owning both the S&P 500 and real assets in retirement. Both types of assets come with risks, and VanEck has a pair of funds designed with downside protection in mind.
“Most investors would benefit from some exposure to the S&P 500, because it’s a very durable asset, but there are times when you don’t want to be too invested,” he said. “We use things like trend, mean reversion, sentiment and macroeconomic factors to identify periods that are likely going to be associated with drawdowns.”
The result is ETFs such as the VanEck Vectors NDR CMG Long/Flat Allocation ETF (LFEQ) that toggle between an S&P 500 allocation and Treasury bills, depending on market conditions. Ultimately, the goal is to take cues from technical indicators and mitigate losses in market downturns.
LFEQ came to market last October, and it has amassed $42 million in assets, and has a price tag of 0.59%. The young and novel strategy competes with other ETFs that take on the task of managing downside in equities. Among them is the Innovator Lunt Low Vol/High Beta Tactical ETF (LVHB), which rotates between S&P 500 High Beta Index and the S&P 500 Low Volatility Index based on relative strength. LVHB has $133.5 million in total assets and costs 0.49%.
Another fund in the VanEck lineup, the newcomer VanEck Vectors Real Asset Allocation ETF (RAAX), tries to capture the benefits of real asset investing through a lower-volatility mix of real estate, infrastructure, commodities and natural resource equities, many of which are attractively valued relative to fixed income. The fund can also go all into cash as a downside protection mechanism.
“We all know inflation robs savers of spending power, and right now we’re late cycle,” Schassler said. “At late cycle, that’s when you have periods of strong global growth, and rising inflation. That’s the point of the cycle where real assets typically outperform other asset classes.”