The WSJ recently profiled Colorado Springs financial adviser Allan Roth to get his view on how to construct a diversified, tax efficient and low cost portfolio with exchange traded funds.
The ETFs in Mr. Roth’s streamlined portfolio include:
Vanguard Total Stock Market ETF (VTI)
Vanguard FTSE All-World ex-US ETF (VEU)
Vanguard Total Bond Market ETF (BND)
iShares Barclays TIPS Bond Fund (TIP)
Kiplinger’s Laura Cohn recently wrote about the rising popularity of Bond ETFs and shared a diversified portfolio of five of her favorite exchange traded funds.
The portfolio includes:
25% iShares Barclays 1-3 Year Credit Bond (CSJ)
25% SPDR Barclays Capital International Treasury Bond (BWX)
20% iShares iBoxx $ High-Yield Corporate Bond (HYG)
15% iShares Barclays 1-3 Year Treasury Bond (SHY)
15% iShares Barclays TIPS (TIP)
According to Cohn, high income investors should scale the allocation to HYG back to 10% and add:
A model portfolio for Sand Hill Advisors uses both mutual funds and ETFs to allocate across asset classes and geographies.
As the investment firm braces for higher interest rates by paring back on fixed-income exposure, the managers retain 4% of the portfolio in the iShares Barclays TIPS Bond Fund (TIP). For mid-cap exposure, the firm allocates 5% of the portfolio to the iShares S&P MidCap 400 ETF (IJH).
More retirement programs are adopting the use of Exchange Traded Funds according to the WSJ’s Ian Salisbury.
In the article ETFs Make Inroads with 401(k) Investors, Mr. Salisbury writes that three companies that provide 401(k) plans with iShares ETFs to small employers are Ascensus, Plan Administrators and The Newport Group.
The most popular ETFs in the retirement programs are the iShares Barclays TIPS Bond Fund (TIP), iShares MSCI EAFE Index Fund (EFA) and the iShares MSCI Emerging Markets Index Fund (EEM).
The WSJ’s Annelena Lobb weighs the risks and benefits of hedging against inflation with TIPS.
In the article Investors Seek Inflation Haven in TIPS Funds, Lobb writes that inflation worries has resulted in more than $17 billion pouring into funds that invest in government-issued bonds whose principal grows with rising inflation.
While the principal of TIPS is tied to the inflation rate, the value of TIPS in the secondary market is also driven by inflation expectations. So the risk of TIPS investing is that the securities could fall in a scenario where inflation expectations turn out to be wrong.
ETF investors have several TIPS funds to choose from. The Barclays Capital TIPS Bond Fund (TIP) tracks an index that includes all publicly issued, U.S. Treasury inflation-protected securities that have at least 1 year remaining to maturity, are rated investment grade and have $250 million or more of outstanding face value.
The SPDR Barclays Capital TIPS ETF (IPE) is similar to TIP but is restricted to issues that are $500 million or larger.
A recent addition to the ETF universe is the PIMCO 1-5 Year U.S. TIPS Index Fund (STPZ) which tracks an index of U.S. Treasury Inflation Protected Securities with a remaining term to final maturity less than 5 years and not less than 1 year.
Interational TIPS are also accessible through ETFs. The SPDR DB International Government Inflation-Protected Bond ETF (WIP) tracks an index that measures the total return performance of inflation-linked government bonds from developed and emerging market countries outside of the United States.
In anticipation of coming inflation, investors are flocking to TIPS ETFs according to the Investment News‘ Sue Asci.
In the article Scared investors flock to TIPS as inflation hedge, Ms. Asci reports that the three TIPS ETFs have attracted $5.8 billion of new funds in 2009 through July 31.
TIPS, or Treasury Inflation Protected Securities, are essentially long term government bonds with inflation protection built-in. ETFs that focus on TIPS include:
Retail investors are moving to fixed-incomes assets, especially exchange traded funds, after watching stocks drop 37% last year.
That’s according to Forbes reporter Matthew Craft who writes about the move to fixed-income ETFs in the story The New ETF Darlings.
Craft notes two of the four fastest growing iShares funds in July were bond ETFs: the iShares Barclays TIPS Bond Fund (TIP) and iShares Barclays 1-3 Year Credit Bond Fund (CSJ).
Craft also mentions that bond giant Pacific Investment Management Company (PIMCO) launched its first bond ETF in June, the PIMCO 1-3 Year U.S. Treasury Index Fund (TUZ).
Exchange traded funds can play an important role in protecting a portfolio against inflation according to John Spence’s article Whip Inflation with ETFs.
Spence writes that using specialized exchange-traded funds to guard portfolios against inflation is becoming popular in light of massive government spending to combat the economic recession and the prospect of a weaker U.S dollar. The specific concern is that the Federal Reserve will be slow to raise rates once the U.S. economy turns the corner.
How can ETF investors protect their portfolios against rising prices?
TIPS
Spence suggests considering Treasury Inflation Protected Securities, or TIPS, as a straightforward way to purchase inflation insurance. TIPS ETFs include the iShares Barclays TIPS Bond Fund (TIP) and SPDR Barclays Capital TIPS (IPE). The SPDR DB International Government Inflation-Protected Bond ETF (WIP) follows inflation-indexed bonds in foreign markets.
Gold and Commodities
For investors seeking to use gold and other commodities as an inflation hedge, Spence mentions several ETFs including:
Metals
SPDR Gold Trust (GLD), iShares Silver Trust (SLV), PowerShares DB Gold Fund (DGL) and PowerShares DB Precious Metals Fund (DBP) and PowerShares DB Base Metals Fund (DBB)
Food
PowerShares DB Agriculture Fund (DBA)
Oil and energy
United States Oil Fund (USO), Energy Select Sector SPDR Fund (XLE)
Commodity baskets
PowerShares DB Commodity Index Tracking Fund (DBC), iShares S&P GSCI Commodity Indexed Trust (GSG)
Other Options
Spence also points out that some investors bet against the U.S. dollar (CurrencyShares Euro Trust (FXE) or PowerShares DB Dollar Index Bearish Fund (UDN)) or long term treasuries (ProShares UltraShort 20+ Year Treasury (TBT)) as ways to hedge against inflation.
Active fund managers think they can do better than index funds in the market for Treasury Inflation Protected Securities or TIPS.
That’s according to the WSJ’s Ian Salisbury’s analysis of a recent research report by Pacific Investment Management Company (PIMCO). The report points to the fact that the TIPS market is small relative to the overall government bond market which arguably makes it less efficient.
The report also argues that TIPS ETFs such as the iShares Barclays Capital TIPS Bond Fund (TIP) have predictable trading patterns that other traders can profit from.
An iShares spokesperson comments that ETF managers actually have more flexibility than the PIMCO report describes. Ironically, PIMCO has filed to bring several new TIPS ETFs to market.
More and more investors have been moving money into Bond ETFs according to WSJ reporter John Spence.
In the article, Bond ETFs Draw a Surge of Funds, Spence reports that the two best selling fixed income ETFs in the iShares line-up are bond funds. In fact, the iShares iBoxx $ Investment Grade Corporate Bond Fund (LQD) has seen net inflows of nearly $5 billion.
Junk bond ETFs have also done well including the iShares iBoxx $ High Yield Corporate Bond Fund (HYG) and the SPDR Barclays Capital High Yield Bond ETF (JNK).
Spence also points out that inflation fears flamed by loose monetary policy and unprecedented government spending have investors putting money into Treasury Inflation Protected Securities or TIPS. For example, the iShares Barclays TIPS Bond Fund (TIP) has doubled in 2009.
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