Exchange-traded funds (ETFs) are becoming a go-to option for many retirees, with their low-fees, often a sliver of mutual-fund management expense ratios (MERs), and a growing selection. The challenge is selecting the right solutions at this life stage.
“Once you start drawing capital down, portfolio construction gets more complicated,” says Dan Bortolotti, a portfolio manager with PWL Capital in Toronto.
Products such as Vanguard’s Balanced ETF Portfolio (VBAL-T), with a 0.24-per-cent MER, can be a set-it-and-forget-it single investment when you’re in accumulation mode. It’s a portfolio of ETFs with 60-per-cent exposure to global equities and a 40-per-cent allocation to global fixed income. Retirees could use such all-in-one balanced ETFs for growth and income.
But they may need to sell units for cash needs, says Alan Fustey, a Winnipeg-based portfolio manager with Adaptive ETF, a division of Bellwether Investment Management Inc. “If you want to make it really simple, you could hold one fully diversified portfolio ETF designed to produce income.”
This series address the need for retirement income, as it aims to pay out a set 6-per-cent annual yield as monthly distributions, says Chris McHaney, portfolio manager of Exchange-Traded Funds at BMO Global Asset Management.
Similar choices include Vanguard’s Retirement Income ETF Portfolio (VRIF-T), which provides a monthly distribution set yearly, based on the fund performance. Currently, that’s equivalent to a 4.51-per-cent annual yield.
VRIF, with a 0.30-per-cent MER, is more conservative with a 30-per-cent equities and 70-per-cent bond allocation. ZBAL’s distribution ETF has the mirror-opposite allocation. While VRIF’s distribution is based on underlying investments’ performance, ZBAL’s income version “will give you 6 per cent whether the return is 10 per cent or 4 per cent,” Mr. Fustey says.
Retirees can build their own portfolios, mixing-and-matching different yield-oriented ETFs ranging from fixed income to equity funds designed to spin off income. Some equities ETFs provide growth and income by selling covered calls on the portfolio.
“You’re trading off upside growth on the equities for cash flow today,” says Mr. McHaney in reference to products such as BMO’s Covered Call Canadian Banks ETF (ZWB-T) with a 7.93-per-cent yield and 0.72-per-cent MER.
For retirement, investors can also select from several monthly income funds, including iShares Canadian Financial Monthly Income ETF (FIE-T) made up of stocks of financial institutions, and their S&P/TSX Canadian Preferred Share ETF (CPD-T), with a 0.91-per-cent MER and a yield of 7.69 per cent.
Income funds are designed to provide sustainable distributions without eroding capital, though that may still occur, Mr. Fustey says. “The idea of spending the income and leaving capital intact is nice, but when you go through a difficult period like last year, these funds’ NAV [net asset value] goes down.”
That can lead to a drop in income. However, today’s market environment offers significantly higher yields than we’ve seen for more than a decade, Mr. Bortolotti says. “More than ever, a 4-per-cent yield is sustainable, as bonds are yielding more than 4 per cent,” he says.
A case in point is the iShares Core Canadian Short Term Bond Index ETF (XSB-T), with a 5.26-per-cent yield to maturity. Retirees could pair this ETF, with a 0.1-per-cent MER, with the iShares Core Equity ETF Portfolio (XEQT-T) and its 0.2-per-cent MER. That could deliver growth to build a diversified, simplified portfolio, Mr. Bortolotti suggests.
No matter how straightforward the portfolio, retirees can still be challenged to balance growth, capital preservation and steady income to meet cash needs. One strategy is to set aside cash for at least one year’s worth of expenses, along with GICs for two to five years of cash requirements, if markets take longer to recover, Mr. Bortolotti says. “That way, you don’t sell fund units when they are down.”
For a liquidity pool, retirees can choose from many high-interest savings ETFs, including CI High Interest Savings ETF (CSAV-T), which has yield of about 5.2 per cent and 0.16-per-cent MER.
“But a high-interest savings account might work best, because you don’t have to buy and sell ETF units,” Mr. Fustey says.
Investors have many ways to build a retirement ETF portfolio, but the fund choices can feel overwhelming and the more ETFs a portfolio holds, the more oversight is required, Mr. Bortolotti says.
“A true set-it-and-forget-it drawdown strategy really doesn’t exist,” he says. But what comes close is a portfolio with balanced, global ETF generating monthly income, a few GICs and a high-interest savings account. “You could do a lot worse.”