Is 60/40 Rule Obsolete Now? 5 High-Yielding ETFs to Play

As one enters the retirement period, a smart allocation of assets is needed to enjoy a regular stream of income. Earlier, a rule of thumb was followed by the retirement corpus, which said that the stock part of one’s portfolio should equal 100 minus the retiree’s age. For example, if an investor retires at 60, 40% of his total savings would go to stocks and the rest to bonds.

But strategists from Bank of America and J.P. Morgan now see the end of success in the 60-40 standard portfolio, per articles published on MarketWatch. J.P. Morgan believes that a traditional 60/40 portfolio will deliver annual returns of 3.5% over the next decade, compared with 10% over the past few decades.

The key reason is meager interest rates from government bonds in a rock-bottom interest rate scenario. As of Jul 16, 2020, the benchmark U.S. treasury yield was 0.62% while the real benchmark yield was negative 0.79%. Real yields have been negative from all the maturities’ periods including 5-year, 7-year, 10-year, 20-year and 30-year.

What Do Wall Street Strategists Believe?

“The relationship between asset classes has changed so much that many investors now buy equities not for future growth but for current income, and buy bonds to participate in price rallies,” said Bank of America strategists.

“In the zero-yield world, which we think will be with us for years, bonds offer neither much return nor protection against equity falls,” said Jan Loeys and Shiny Kundu, strategists at JP Morgan, in a recent note, as quoted on MarketWatch.

“With yields so low, bonds can no longer do all the things they’ve been doing for investors during this secular declining interest rate environment over the last forty years,” said David Jilek, chief investment strategist at Gateway Investment Advisers, noted MarketWatch.

How to Fight Low-Yield Environment & Earn Higher Current Income?

We have highlighted below a few high-yielding ETF options for today’s coronavirus-inflicted environment.

Dividend-Heavy ETFs

One solution to deal with record-low interest rates could be investing in dividend-oriented stocks. However, the coronavirus outbreak made matters tough with many companies cutting or halting dividends. One has to choose companies with a history of dividend payments and providing decent yields too.

Schwab U.S. Dividend Equity ETF SCHD follows the Dow Jones U.S. Dividend 100 Index, which is designed to measure the performance of high-dividend yielding stocks issued by U.S. companies that have a record of consistently paying dividends, selected for fundamental strength relative to their peers, based on financial ratios. It yields 3.44% annually and charges 6 bps in fees (read: A Quick Guide to Dividend Aristocrat ETFs).

Convertible Bond ETFs

Convertible bonds are those that can be exchanged if the holder chooses to, for a specific number of preferred or common shares if the company's share price climbs past a said conversion price during the bond's tenure. The main difference of the asset with the traditional bonds is that convertible bonds offer investors the right to convert their bond holdings into a company’s shares at the holder’s discretion.

SPDR Bloomberg Barclays Convertible Securities ETF CWB is designed to represent the market of U.S. convertible securities. It yields 2.68% annually and charges 40 bps in fees (read: Convertible Bond ETFs: A Pandemic Winner).


Investors looking to play domestic mortgage backed bond markets though a single ETF can invest in mortgage backed securities (MBS). Normally, MBS yields higher than the Treasury bond with similar credit rating. Mortgage volume might pick up in the coming quarters as record-low mortgage rates are also likely to boost application volume. With the Fed acting super-dovish, the price of this MBS ETF will tend to increase.

Vanguard MortgageBacked Securities ETF VMBS follows the Bloomberg Barclays U.S. MBS Float Adjusted Index, which covers U.S. agency mortgage-backed pass-through securities. It yields 2.18% annually and charges 5 bps in fees.

Private Equity ETFs

Private equity firms bring in the much-needed cash to small and medium-sized companies. Private equity is composed of funds and investors that directly invest in private companies, or that engage in buyouts of public companies, resulting in the delisting of public equity.

Invesco Global Listed Private Equity ETF PSP includes securities, ADRs and GDRs of 40 to 75 private equity companies, comprising  BDCs, MLPs and other vehicles whose principal business is to invest in, lend capital to or provide services to privately held companies. The fund yields as high as 8.52% annually and its expense ratio is 1.78%.

Junk Bonds

Junk bonds or below-investment grade bonds should quench investors’ thirst for yields. The Fed’s decision to buy some high-yield corporate bond ETFs went well with this asset class in recent weeks.

SPDR Bloomberg Barclays High Yield Bond ETF JNK, which measures the performance of publicly issued U.S. dollar denominated high-yield corporate bonds with above-average liquidity, yields 5.65% annually and charges 40 bps in fees.

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SPDR Bloomberg Barclays High Yield Bond ETF (JNK): ETF Research Reports
Invesco Global Listed Private Equity ETF (PSP): ETF Research Reports
SPDR Bloomberg Barclays Convertible Securities ETF (CWB): ETF Research Reports
Schwab U.S. Dividend Equity ETF (SCHD): ETF Research Reports
Vanguard MortgageBacked Securities ETF (VMBS): ETF Research Reports
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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