In the search for the best ETFs for retirement, I discovered what I first thought were really bizarre exchange-traded funds that seemed to make little sense for any portfolio. If a fund isn’t something that sounds familiar, I thought, it should be ignored.
The problem was this was before I came to understand how important non-correlated investments are to any long-term diversified portfolio. Non-correlated investments are essential to your portfolio because they tamp down volatility, and therefore risk, in your portfolio. You don’t want all of your investments moving in the same direction or by the same amount as the overall market, and that’s why you should consider specialized ETFs for retirement.
Non-correlated investments aren’t going to blow the doors off of the return numbers, but that’s not their purpose. Their purpose is to give you as broad exposure as possible to the overall market, and they are necessary ETFs for retirement
The Liberty Portfolio, my investment advisory newsletter, aims to deliver a rate of return that is designed to be the true rate of inflation (which is closer to 8% to 10%, not 3%), and does so with less risk than the overall market, because it invests in heavily non-correlated investments.
I discovered three ETFs for retirement that provided this conservative, non-correlated approach to investing that you may want to consider.
ETFs for Retirement: PowerShares S&P 500 Low Volatility (SPLV)
The PowerShares S&P 500 Low Volatility (NYSEARCA:SPLV) is a straightforward, yet perhaps unexpected, fund to lead the charge as far as ETFs for retirement go. Instead of just investing in the entire S&P 500, the SPLV only invests in the least volatile 100 stocks in the index.
Less volatility means less risk. It doesn’t always mean higher returns, but the point of reduced risk is to still capture some upside and only some of the downside of the total index.
Specifically, over the last three years, the SPLV has captured 71% of entire index’s upside yet only 47% of its downside. That’s the kind of approach you are looking for — reduced volatility that exposes you to less downside.
ETFs for Retirement: IQ Hedge Multi-Strategy Tracker ETF (QAI)
The IQ Hedge Multi-Strategy Tracker ETF (NYSEARCA:QAI) is another really interesting ETF. It may sound very risky at first, but in fact, it puts investors into exactly the kind of non-correlated investments one should look for.
The fund attempts to mirror “the risk-adjusted return characteristics of the collective hedge funds using various hedge fund investment styles, including long/short equity, global macro, market neutral, event-driven, fixed income arbitrage and emerging markets.”
The fund currently holds 22% in short-term bonds, 12% in investment grade bonds, 8% in treasury bonds, 4% in the Russell 1000 Growth index, 4% in senior loans — and these are all other ETFs it invests in. It also holds about 8% of its portfolio in short positions.
ETFs for Retirement: IQ Real Return ETF (CPI)
The IQ Real Return ETF (NYSEARCA:CPI) is also a “fund-of-funds” that aims to “provide a hedge against the U.S. inflation rate by providing a “real return” or a return above the rate of inflation, as represented by the Consumer Price Index”. As mentioned, the real rate of inflation is not the CPI. It’s much higher. Still, this serves as a modest hedge against some inflation.
How does the fund accomplish this? It rebalances frequently, so it is an actively managed fund. Its five largest holdings include a 25% position that shorts the short-term treasury bonds. That makes sense since yields are rising. It has a 25% position in very short-term government and bank paper. It has a 10% position in gold, a 10% position in the Russell 2000, and an 8% position in 1-3 month T-bils.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.