Thursday, February 14, 2013

Investment Income from Exchange Traded Funds

By Morningstar Investment Research - Click Here for a Free Trial

Income has been the main driver of returns for stocks and bonds throughout most of history. But interest rates have been stuck at zero for years, depriving investors of the sustainable income they enjoyed for decades. Even worse, rates have fallen just as many hardworking Americans are nearing retirement.

Most income-seekers are not navigating these unusual waters as well as they could. Many are settling for lower income streams and investing in low-yielding government and corporate-bond funds or stuffing cash in low-rate CDs. Others don't want to compromise on their income needs; they're snapping up high-yield bonds and dividend-paying stocks of questionable quality. This unconventional environment demands an unconventional strategy.

As editor of Morningstar ETFInvestor, I do not promise a road to easy riches. There is no such thing. But I strongly believe that exchange-traded funds offer income-seeking investors viable global alternatives--alternatives that were not available just a few years ago. I deliver my ideas to investors each month in the pages of my newsletter.

The biggest mistake in income investing is targeting a yield level. The path to sustainable income generation is constructing a portfolio focusing on total return--a total return that you can tap into for income. Doing "income" right isn't just about finding the most attractive yield opportunities today. It's also about focusing on total return and being disciplined enough to walk away when the prospective rewards aren't rich enough.

My investing strategy at ETFInvestor is simple: Buy discounted assets with improving fundamentals across the globe. I think boring happens to be beautiful, so don't expect me to make crazy bets. Instead, expect me to lean on the world-class fundamental research conducted by Morningstar's bench of more than 150 stock, bond, and fund analysts, as well as data you likely won't find anywhere else.

I manage two portfolios, backed by a sizable stake of Morningstar's money and much of my own personal wealth. Both strategies are the result of distilling the most robust drivers of outperformance to be found in academic and practitioner research. My pain is your pain, so you can be sure I'll be watching our nest egg like a hawk.

The ETF Income Portfolio features a high-quality collection of income-generating ETFs with the goal of earning 5% in excess of the 30-day T-bill rate over a full business cycle. In this portfolio, I'm seeking real absolute returns--returns you can use as income to pay bills, take a vacation, or do whatever you need to.

The ETF Global Asset-Allocation Portfolio, on the other hand, doesn't have an absolute-return goal, nor is it expressly income-oriented. Here, I'm looking to outperform the 60/40 MSCI ACWI/Barclays US Aggregate benchmark over a full business cycle with the least risk possible. I invest this portfolio in ETFs representing undervalued asset classes, sectors, and markets around the world with improving fundamentals.

In addition to providing you with portfolio updates each month, I provide a bird's-eye view of valuations around the globe, portfolio construction advice, and data on the 350 biggest and most popular ETFs. Subscribers also receive my intra-issue emails, which keep you updated on trades and news events as they happen, as well as access to our real-time website.

There are plenty of charlatans out there promising high yields with low risk and little work. The reality is that investing is hard work. And income investing in a low-yield world is extra hard and demands unconventional thinking.

Whether you're an income-seeker or are simply looking for new total return ideas, give Morningstar ETFInvestor a try. Click the link above for a free trial.

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