A Boomer Strategy With Sector ETFs

February 02, 2016

This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today's article features Ben Doty, senior investment director for wealth manager Koss Olinger of Gainesville, Florida.

One of the fastest-growing segments of the population is undoubtedly consumers who are older, led by the baby boomers.

No pooled investment vehicles have emerged—even though they will—to take advantage of this strong demographic trend. Back in 2008, J.P. Morgan had put together an Aging Population Index, but in a matter of only a few years, all trace of it vanished.

While it is difficult to differentiate stocks by population served, it is possible to take advantage of sectors that may, and have, benefited from the trend. The following is a list of sectors that will likely benefit from the retirement of baby boomers in full swing and ETFs offering that exposure:

Health Care

It is no surprise that older Americans use health care at higher rates than younger Americans. Pharmaceutical, medical device, biotech and medical service companies should all benefit from the tail wind of older Americans, especially with the expansion of health care through the Affordable Care Act. The Centers for Medicare & Medicaid Services estimate that health care spending will grow at a compounded annual growth rate of 5.9% through 2023.

Representative ETFs: Vanguard Health Care (VHT | A-95); iShares Global Healthcare (IXJ | A-91); Health Care Select SPDR (XLV | A-93)

Financials

Retirees depend on investment products for their income needs. Wealth management arms of large banks have been one of the primary beneficiaries of retirees seeking extra financial services.

Representative ETFs: Vanguard Financials (VFH | A-97); iShares U.S. Financials (IYF | A-96); Financial Select SPDR (XLF | A-92)

Consumer Goods, Particularly Staples

Fixed incomes bring forth consumers who are more judicious about their purchases. In such a situation, consumer staples should continue to be a strong beneficiary of retirees who are forced to make spending choices in their budgets. Some discretionary industries such as leisure and travel should also be beneficiaries of a growing boomer population.

Representative ETFs: Vanguard Consumer Staples (VDC | A-96); iShares U.S. Consumer Goods (IYK | A-86); Consumer Staples Select SPDR (XLP | A-96)

Utility, Other Income-Producing Stocks

In a world where 10-year U.S. Treasury securities offer a yield around 2%, steady dividend payers will be an attractive option for those on fixed incomes. Stocks, such as Duke Energy (DUK), offer dividend yields in excess of 4%.

A boomer sector strategy portfolio with 30% exposure in the health care sector, consumer staples and utilities sectors each, as well as a 10% allocation to financials, beats the S&P 500 Index by 177 basis points each year over 10-plus years (+9.08% versus +7.31%), if it is rebalanced quarterly, through the end of December 2015. It does so with a significantly higher Sharpe ratio (0.71 versus 0.47). Moreover, because of its concentration in defensive holdings, it can act as low-beta exposure.

Below is a representative set of ETFs that can provide this sector exposure. Other ETF providers have similar products. Guggenheim, for example, offers equal-weighted versions of the product with stocks from the S&P 500.

  Vanguard iShares State Street
Health Care Vanguard Health Care (VHT) iShares U.S. Healthcare (IXJ) Health Care Select SPDR (XLV)
Financials Vanguard Financials (VFH) iShares U.S. Financials (IYF) Financial Select SPDR (XLF)
Consumer Staples Vanguard Consumer Staples (VDC) iShares U.S. Consumer Goods (IYK) Consumer Staples Select SPDR (XLP)
Utilities Vanguard Utilities (VPU) iShares U.S. Utilities (IDU) Utilities Select SPDR (XLU)

At the time of this writing, the author's firm held XLV, XLF, XLP and XLU. Koss Olinger offers wealth management and retirement solutions for individuals, as well as investment strategies and turnkey asset management programs for institutions and advisors. The firm's investment strategies bias toward value-oriented, defensive opportunities. You can reach Ben at [email protected].

 

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