ETF Income Investing Strategies for Clients in 2023

ETF Income Investing Strategies for Clients in 2023

Advisor shares income ETF strategies for balancing inflation and recession risk.

Advisor
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Reviewed by: Lisa Barr
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Edited by: Lisa Barr

[This article is part of a new series from etf.com highlighting financial advisors.] 

 

Stephen TuckwellStephen Tuckwood, CFA, is director of investments at Modern Wealth Management, an advisory firm specializing in financial planning, tax planning and preparation, risk management, estate planning and more. etf.com's Kent Thune talked with Tuckwood about ETF strategies, particularly for clients seeking income in a challenging environment of high inflation and a weakening economy.

 

etf.com: How do you use ETFs in your investment tactics and portfolio strategies?  

Stephen Tuckwood: We use ETFs within various portfolio strategies for efficient access to multiple asset classes. We find them to be an effective vehicle for both tactical trades and longer-term strategic implementations. 

On the tactical trading side, we get the benefit and flexibility to trade intraday at NAV, and on the strategic side, we get superior tax efficiency and tight tracking to their respective index. 

etf.com: Given the challenging environment of persistent inflation and risk of recession, how are you managing fixed income now? 

Tuckwood: Our current approach to fixed income is twofold: Lock in the higher yields on the front end of the curve for income generation, and then add targeted amounts of duration on the longer end of the curve as a recession hedge.  

If the likelihood of a recession were to increase or ultimately materialize, then the yield curve would likely invert further benefiting longer dated bonds. We’ve found the iShares 0-5 Year TIPS Bond ETF (STIP) to be an effective way to gain access to inflation-protected bonds with low duration on the short end.  

Additionally, there are multiple ETFs available from iShares, including the iShares 3-7 Year Treasury Bond ETF (IEI), the iShares 7-10 Year Treasury Bond ETF (IEF), the iShares 10-20 Year Treasury Bond ETF (TLH) and the iShares 20+ Year Treasury Bond ETF (TLT), that enable us to pinpoint positions along the yield curve to control our duration exposure, all without taking on credit risk. 

etf.com: To expand on the previous question, what are some of your go-to dividend investments for income investors seeking yield? 

Tuckwood: The best form of income we’re seeing right now is the short end of the Treasury market. Running up to the debt ceiling deadline, many active funds were moving away from T-bills, driving up yields. This has made for an attractive opportunity, at least in the short term.  

Additionally, the short end of the municipal bond market also appears to be attractive. An effective way to implement to this area of the market via ETFs is with iShares iBonds.  

Unlike typical evergreen ETFs, these mature on a predetermined date just like an individual bond. For example, the iShares iBonds Dec 2026 Term Muni Bond ETF (IBMO) provides the diversification of a bond fund, but with a set maturity. 

etf.com: Income investing can be challenging for retirees in 2023. What does your typical retired client portfolio look like?  

Tuckwood: All our portfolios are custom built to the needs of each individual client, but two common themes for retiree portfolios are: 1) a focus on income production; and 2) protection of portfolio principal.  

We achieve this through balanced portfolios with intentional amounts of risk, and an acute focus on cost. ETFs are an essential part of the toolkit, as they provide effective and efficient ways to gain access to a wide variety of asset classes.  

etf.com: What concerns do your retired clients have about the current economic environment, and how are you addressing them? 

Tuckwood: The rate of inflation has subsided, but it remains stubbornly elevated versus the low levels that we’ve enjoyed in the recent past. With the debt ceiling debate resolved, concerns have turned back to general economic growth.  

With a restrictive Fed, and a tightening of financial conditions, robust economic growth will likely remain challenging. However, the jobs market has remained strong and corporate profits are holding up. 

Advisor Views is a bi-weekly Q&A-style series that features voices from across the financial planning industry sharing insights on investment strategy and portfolio management as it relates to the current economic environment.

The format enables advisors to respond in their own words to specific questions designed to provide readers with practical tools and tactics that can be applied to managing client portfolios.