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Retirement Portfolios & ETFs

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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, 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.

“Exchange traded funds trade like stocks, not like mutual funds,” says Tutt. “So you can’t just use them and say all right, whatever I do in mutual funds I’m going to do in exchange traded funds, because of the trading uniqueness, particularly when things are volatile. You have to pay a lot more attention to what your pricing is and where the markets are.”

Helen Modly, CFP, ChFC and executive vice president with Focus Wealth Management Ltd., in Middleburg, Va., says her firm uses ETFs as core holdings, because the funds can span an asset class while keeping costs and taxes lower. She also uses the SHY fund, although the firm favors individual bond ladders for fixed-income holdings.

Modly also offers a caution on using ETFs for the fixed-income portion of portfolios. “One thing you have to watch with bond funds is the premium to net asset value spread that develops,” she says.

“Theoretically, there really shouldn’t be much of a spread between the price of the ETF and the value of the underlying net asset value of the bonds in it. But we’ve seen situations in the last year where some of these spreads are lasting three weeks to a month, and some of them are spreads of two, three, four, five percent.

“So we feel that if you’re using the ETFs on fixed income, it seems to be a little bit safer to use the ones that have very liquid, highly traded issues in them, like you would see in the Treasurys or the agency bonds, the high-grade corporates, versus some of the spreads on the more thinly traded issues seem to be more pronounced,” Modly shares.


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