Dear Nancy;
I have a low seven-figure investment portfolio and am about to retire. Is it better for me to continue to own a ladder of individual bonds and some 15 to 20 dividend paying stocks, or to move to a pure ETF portfolio such as a ZMI or XTR with a small postion in something like a U.S. dividend ETF and an international dividend ETF in order to get income going forward and maintain my preferred balance of stocks and bonds, which is similar to that held by ZMI or XTR?
I would appreciate your input.
Greg
Dear Greg,
The more important question to ask yourself is how diversified do you think you want to be? You are going to indirectly own more stocks through the ETF versus owning the 15 to 20 individual dividend paying stocks. The ETF, iShares S&P/TSX60 for example, is a basket of 60 stocks wrapped up in the one ETF. The Claymore Canadian Fundamental Index ETF has 117 stocks.
The more diversified you are, or the more stocks you own, lowers your risk and volatility relative to the market.
As you can see, owning even one ETF means you own many more stocks than the 15 to 20 you are thinking about. A combination of an index ETF as a foundation with a variety of individual dividend stocks is a good strategy as well.
With regards to your fixed income, I prefer a ladder of fixed income maturities primarily because of the transparency of knowing what is maturing when. You can then alter the duration of your bonds if necessary. Remember that there are other investment instruments that are considered fixed income without being interest paying bonds and stripped coupons. It is important that investments be owned in the most appropriate account (for instance, registered plans versus investment accounts.)
If you are seeking diversification geographically as well as across sectors, a foreign ETF is the better route than trying to find individual companies. This is especially true when you don't live in that country or area.
It would be wise to get a second opinion so you can have the discussion of what is most suited to your risk tolerance and portfolio expectations.
Nancy Woods, CIM, FCSI, is an associate portfolio manager and investment advisor with RBC Dominion Securities Inc. To ask her a question, send an e-mail to asknancy@rbc.com or visit her web site at nancywoods.com
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