New Opportunities for Retirement Income
Retirees seeking income investments will find new opportunities in ETFs. New ETFs are created each year to cover every conceivable market sector.
Exchange-traded funds (ETFs) are uniquely suited for individual investors because they offer low- cost, flexible ways to diversify within the sector they buy. Each represents shares in a portfolio of underlying investments (such as stocks, bonds, gold, timber, etc.) that the ETF manager selects to achieve his ETF’s purpose. For retirees, income-based ETFs could include fixed-income ETFs and dividend-based ETFs.
Fixed-income ETFs are made up of short-, intermediate- and long-term Treasuries, corporate bonds, TIPS (Treasury inflation-protected securities) and municipal bonds.
Bond ETFs offer benefits similar to those of stock ETFs, such as low cost, diversification, and the ability to trade shares throughout the day. As with bonds themselves, the prices of bond ETFs vary inversely with the level of interest rates – i.e. rising rates lead to falling bond ETF prices and vice versa. So an increasing fixed-income ETF portfolio value may reflect a declining income return.
Like most bond funds, fixed-income ETFs do not pay a fixed rate of return and do not guarantee that your investment will be recouped when you cash out. Bond ETFs pay monthly dividends in cash.
Many bond ETFs feature low expense ratios (expense to ETF value) – a major plus for fixed-income portfolios, particularly during times of low returns. But since you might incur a commission charge on each ETF trade you make, trading too frequently could offset the benefit of a low expense ratio. Minimization of tax, which is an advantage for stock ETFs, is not relevant with bond ETFs because of their income orientation.
Like Treasury securities themselves, Treasury bond ETFs generate income that is subject to federal income tax, but should be exempt from state and local income taxes if the fund sponsor meets the state’s administrative requirements to allow for this.
New dividend-based ETFs provide you access to high-yielding preferred stocks. Such ETFs may focus on higher-yielding stocks, ADRs, REITs, master-limited partnerships, closed-end funds, and preferred stocks.
These would produce current taxable earnings, again, due to the nature of an income-generating investment.
A balanced portfolio of Stock, Bond and other ETFs might be an appropriate method of building a retirement portfolio focused on income and inflation protection.