For many investors, reviewing the asset allocations of their portfolios sounds about as appealing as a visit to the dentist.
Is rebalancing really necessary?
“If you’re in your 30s or 40s and you think you have at least 20, 25 years until retirement, you probably shouldn’t do a lot of shifting around in terms of your portfolio’s asset class exposures,” says Morningstar director of personal finance Christine Benz.
However, if you’re nearing retirement–someone older than 50 and getting within 10 to 15 years of retirement–Benz suggests taking a hard look at your asset mix.
To Benz’s point, the Morningstar U.S. Market Index is up about 15% per year for the trailing five-year period as of this writing. Meanwhile, the Bloomberg Barclays U.S. Aggregate Bond Index is up less than 4% annually during the same period, and the MSCI EAFE Index is up 9% annually over that same stretch. As such, investors may find that their portfolios are heavy on U.S. equities and light on bonds and international stocks.
If you already own a solid bond or international fund, it may make most sense for you to jettison some dollars from elsewhere in your portfolio to these existing holdings rather than initiate new positions. But if not, here are a few mutual fund and exchange-traded fund ideas to fill in the gaps.
Top Taxable-Bond Funds
For bond-fund seekers looking for a solid core fund, we suggest plucking one from either the intermediate core bond or the intermediate core-plus bond Morningstar Categories. Funds in both categories invest largely in investment-grade U.S. fixed-income issues, including government, corporate, and securitized debt; they usually maintain durations that range from 75% of 125% of the three-year average effective duration of the Morningstar Core Bond Index. The difference: Core-plus funds have more flexibility to own noncore bonds, such as corporate high-yield, bank-loan, and emerging-markets debt. Funds in both categories therefore provide a lot of diversification in a single holding, and as a result they don’t court excessive interest-rate or credit risk.
Benz uses three intermediate-term bond funds across her main model portfolios for retirees and savers. Harbor Bond (HABDX), which earns a Morningstar Analyst Rating of Gold and lands in the core-plus category, is the choice for Bucket 2 of her mutual fund portfolios for retirees. Subadvised by Pimco, Harbor Bond benefits from the firm’s significant resources, blending Pimco’s well-regarded macro forecasting with bottom-up analysis. Modest expenses seal the deal.
Gold-rated iShares Core Total USD Bond Market ETF (IUSB), another core-plus fund, fills the intermediate-term bond role in Benz’s ETF-focused portfolios for retirees and retirement savers. This passively managed portfolio provides exposure across the entire credit spectrum. Because the portfolio is market-cap-weighted, it includes significant exposure to the highest-quality bonds, which makes the fund a little more vulnerable to interest-rate movements than other intermediate-term bond choices.
Silver-rated Metropolitan West Total Return Bond (MWTRX)–which lands in the core-plus category, too–is a holding in Benz’s model mutual fund portfolios for retirement savers. Actively managed by value investors looking to buy bonds when they’re cheap and sell when they get expensive, the fund has done an excellent job taking advantage of market dislocations over the long term.
In addition to those already mentioned, several other intermediate-term mutual funds earn Gold ratings. Baird Aggregate Bond (BAGIX), Fidelity U.S. Bond Index (FXNAX), iShares Core U.S. Aggregate Bond ETF (AGG), SPDR Portfolio Aggregate Bond ETF (SPAB), TCW Core Fixed Income (TGCFX), Vanguard Total Bond Market (VBTIX)/(BND), and Western Asset Core Bond (WATFX) are in the core category. BlackRock Total Return (MPHQX), Dodge & Cox Income (DODIX), Fidelity Total Bond (FTBFX)/(FBND), Loomis Sayles Core Plus Bond (NERYX), Pimco Total Return (PTTRX), Pimco Total Return ESG (PTSAX), and Western Asset Core Plus Bond (WACPX) hail from the core-plus category.
Dig deeper: The Best Taxable-Bond funds
Top Foreign-Stock Funds
When it comes to international fare, we suggest using a well-diversified, large-cap-focused fund as the core; you’ll find such funds in the foreign large-blend category. These funds generally provide exposure to foreign large-cap stocks with both growth and value characteristics, and include some smaller companies and emerging-markets stocks, too.
Silver-rated American Funds International Growth and Income (IGFFX) helps fill Bucket 3 of Benz’s model portfolios for retirees. The fund, which is available via some no-transaction-fee networks, favors dividend-payers overseas; it’s therefore a sensible way for those in retirement to get some exposure to international stocks.
For her retirement saver portfolios, Benz opts for Gold-rated Vanguard Total International Stock Index (VTIAX). Tracking the FTSE Global All Cap ex U.S. Index, this fund includes companies of all sizes from more than 40 developed and emerging markets, making it among the most comprehensive portfolios in the foreign large-blend category. It’s among the lowest-cost choices, too.
Among ETFs, Benz uses Silver-rated Vanguard FTSE Developed Markets ETF (VEA) in her retirement saver portfolio and Gold-rated Vanguard FTSE All-World ex U.S. ETF (VEU) in Bucket 3 of her model portfolios for retirees. The former tracks the FTSE Developed All Cap ex U.S. Index, which covers stocks of all sizes from 23 foreign developed markets; the portfolio features many multinationals with globally diversified operations. The latter fund differs from the former by including stocks from developing markets, too.
Other Gold-rated funds in the foreign large-blend category include FMI International (FMIJX), iShares Core MSCI Total International Stock ETF (IXUS), Vanguard Developed Markets Index (VTMGX), Vanguard ESG International Stock ETF (VSGX), and Vanguard Total International Stock (VTSNX)/(VXUS).
Dig Deeper: The Best Foreign Stock Funds
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