Though short-focused or commodity-themed exchange traded funds (ETFs) are making headlines for their performance these days, such funds are only a small part of the ETF universe. And more traditional funds can play an important role in a retirement income portfolio, experts say.
Tom Lydon, president of Global Trends Investments in Newport Beach, Calif., author of “iMoney: Profitable ETF Strategies for Every Investor” and editor of the ETFTrends.com, says his approach to using ETFs in a retiree’s portfolio focuses on growth. “We try to go towards growth and peel back income as you need it out of the portfolio, rather than at these drastically low income levels, trying to squeeze as much monthly income out of the products themselves,” he explains.
Lydon takes a tactical approach to selecting ETFs. His firm tracks funds’ 200-day moving average with the goal of recognizing the security’s underlying direction. “If we can put a 200-day moving average on an ETF, we can catch those areas that happen to be trending in the right direction and avoid them when they go below the 200 day average if they’re trending south,” he says.
“So a great example is in the fixed income area, where we saw the bonds, whether they be corporate bonds or government bonds, decimated last fall. If you had simply followed a 200-day average on the ETF, you would have avoided going through that for your clients,” Lydon shares.
Because rates are low, Lydon is sticking with short-maturity ETFs such as iShares Lehman 1-3 Year Treasury Bond Fund (SHY) and iShares Lehman TIPS Bond Fund (TIP) for clients’ fixed-income holdings. “Until the long-term trend changes, and again, it looks like that’s starting to appear just recently, we’re going to stay on the short end of the curve,” he says.
Oliver Tutt, CFP and managing director with Randall Financial Group LLC in Providence, R.I., uses ETFs as part of a total-return approach to structuring retirees’ portfolios. He has clients set aside 12 months of cash flow needs in cash equivalents to avoid market fluctuations affecting their short-term income. ETFs figure prominently in the invested portion of the portfolio, although Tutt offers some cautionary advice on using the funds.