An ETF Portfolio for Both Yield and Safety

How can you find yield and safety in today's Zero Interest Rate Environment?  That is the question retirees and many others are asking?  Conventional wisdom says "You can't . . . the only safety is in cash or treasuries." Historically that has indeed been the case.

However, the U.S. government is currently doing everything possible to keep rates low, and of course we all know you can't fight the Fed.  First the Fed drove down short term rates to zero.   Now, they are targeting longer maturities.  This is a war on savers!

So, are cash and treasuries truly safe?  Considering the U.S. debt situation the short answer is: "no."  Remember deflation and even stagflation is the fixed income investor's friend --  your dollar buys more.  If inflation or currency devaluation occur you do not want to be caught long bonds!  Governments almost always print their way out of a debt crisis, igniting inflation.   The portfolio below, however, provides inflation protection in addition to yield.

The portfolio consists of 7 ETFs and has a yield (equally weighted) of 5.67% and shows a 29.7% YTD gain. Compare this to SPY's 2% yield and 1% YTD gain.  Also, remember, since we are talking ETFs you greatly eliminate corporate or individual sovereign risk.

•  .EMB Emerging Market Bonds (4.7% yield, 15.5%YTD return)
•   LQD  Investment grade Corporate Bonds(4.7% yield, 8.6% YTD return)
•   JNK  High Yield Bonds -- aka junk bonds (9.7% yield, 37.7% YTD return)
•   DGS Small Cap Dividend Emerging Markets (4.8% yield, 83.2% YTD return)
  
•   PEY  High Yield Dividend Achievers (4.3% yield, 3.6% YTD return)
•   IFGL  International Reit (9.5% yield, -3.5% YTD return)
•   VPU  U.S. Utilities (3.8% yield, 11.3% YTD return)

Depending on your particular situation you could over or under weight individual ETFs.  Think a big crash is coming?  Maybe stay away from JNK.  Think Emerging markets will prosper?  Overweight DGS.  Already own substantial real estate?  You could stay from IFGL.  Talk to your financial adviser before investing.

A few comments:  JNK is probably the riskiest.  Yet, hi-yield bonds have strongly out performed the supposedly safer SPY over the last year.  DGS, PEY, IFGL, and VPU  have real assets and provide inflation protection and growth potential in addition to yield.  All but IFGL show positive growth over the past year,  prospering in today's dis-inflationary environment. Strong emerging market exposure minimizes risk to heavily indebted developed countries.

Sure, you can hide out in cash and treasuries but you miss the income and capital appreciation potential of the above portfolio plus you run a significant risk of currency devaluation or inflation.  Hiding in a fox hole may only get you buried some day, maybe some day soon.

Again, investors should do their own research and consult with their own financial adviser before acting on any thoughts expressed here.

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Hot Summer, Hot Bonds

Unrelenting summer heat has broiled most of the U.S. into a stupor.  Russia had extremes of heat and drought not seen in hundreds of years.  Global warming theories are again on the front burner.

The SP500 has wandered aimlessly all summer and now is about where it was in early June.  The U.S. dollar has mostly fallen, though firming recently.  Commodities, as show by the CRB Spot All Commodities Index, are strong and rising.  Equity volume is light, cash positions high.

Many "went away in May" and are sitting out this hot summer in cash or treasuries.  Is this a smart thing to do?  Well, the stash under your mattress may be safe as long as ex-spouses, burglars, mice and the federal government stay away.  I would be most worried about that last one.

But, wow!  Look at the bond markets!  In case you haven't noticed, everything is on a tear.  Treasury, corporate, sovereign, and municipal bonds, all are trending (in some cases rocketing) up.  U.S. 10 year treasuries as shown by IEF recently topped 98 with the yield dipping below 2.6%.

Even traditionally risky bonds are in a strong upswing.  Consider junk (aka hi-yield) issues.  JNK has risen signifigantly over the last 3 months -- no recession predicted here.

Emerging market bonds also continue to out-perform.

As an (perhaps unrelated) aside, note that Obama's economic advisers are jumping ship.   Peter Orszag, director of the Office and Management and Budget (OMB) resigned in late June while the ebullient Christina Romer, chair of the White House Council of Economic Advisers plans on stepping down in September.  Both Orszag and Romer say they are leaving for personal reasons, not job frustrations.  Well . . . draw your own conclusions.

So what to make of it all?  Do record low 10-yr yield indicate a flight to safety ahead of coming crash?  Or, do steadily rising hi-yield (junk) bonds, strong commodities and emerging market indexes indicate a recovering world economy and strengthening inflationary trends?

It may be a mistake to fight a strong trend but I would watch bond markets very carefully.  U.S. treasury upside potential is limited while downside risk is very high --  if bonds crash.  It may not be to early to take a position in TBF or TBT (short and ultra-short 20+ year U.S. treasuries ETFs). At the very least keep a close eye on this market.   Also, you may wish to consider ENY, the Canadian Energy Income Index, which has both yield (3.6%) and real assets of  Canadian oil and gas.  Gold (GLD)  will be strong with currency market disruptions.

With the U.S. government facing northward of $100 trillion dollar in debt obligations eventual massive money printing seems inevitable.  It just isn't here yet.  Things could end badly with high inflation or possible currency (U.S. dollar) devaluation.


The hot summer of 2010 will soon be a memory but if bonds go south a lot of other (unpleasant) things will heat up fast.  We will then long for the days when just the weather was hot.