Listen to The ETF Store Show every Saturday at 3pm on KCMO Talk Radio 710AM as we cover everything you need to know about Exchange Traded Funds and the world of investing.
In this low interest rate environment, it can be incredibly difficult for investors to build a portfolio that provides yield (often provided off of bond interest and stock dividends). Yield is especially important for individuals in retirement or close to retirement that depend on income generated from their portfolios to provide for their living expenses. Unfortunately, many of these investors and their financial advisors have significantly increased the risk profiles of their portfolios in an attempt to chase yield and returns and, as a result, have left their portfolios ill prepared to withstand down markets like the one we’re currently in. On our most recent radio show, we discussed our step-by-step, disciplined approach to retiree portfolios and addressed a recent article by Paul Farrell on Marketwatch that referenced a Financial Planning Association study that concluded “91% of America’s financial planners are pushing clients into riskier investments”. Farrell keenly pointed out that “in today’s highly volatile markets advisers appear to be running as scared as their clients, chasing risky returns.”
We also discussed the significant impact that investment costs can have on a retiree’s portfolio and compared two of the largest bond mutual funds to their ETF counterpart. We looked at American Funds Bond Fund of America, ticker ABNDX, and the PIMCO Total Return Fund, ticker PTTAX. Both of these mutual funds track the Barclays Capital US Aggregate Bond Index. The Bond Fund of America has an expense ratio of .59% and currently yields 3.39%. The PIMCO Total Return Fund has an expense ratio of .90% and a yield of 2.77%. We compared these mutual funds to the Vanguard Total Bond Market ETF, ticker BND, which tracks the exact same index as both of those bond funds and has an expense ratio of .11% and a yield of 3.25%. In addition to a higher net yield than both of the mutual funds, BND has outperformed the PIMCO fund by more than 5% and the Bond Fund of America by over 15% over the past five years!
Investment fees can have a tremendous impact on the long-term performance of a portfolio and the majority of the time, the performance of actively managed mutual funds leaves something to be desired. The bottom line is that high investment costs can erode your income in retirement and not having a sound investment plan in place can expose you to unnecessary risks and jeopardize your comfortable retirement.
Listen to the full show here.
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