Customizing Risk With Targeted Maturity ETFs

Nicole (0:00)

It's time now for our ETF Watchlist segment. Joining me right now is Ken Roban, Wealth Manager, Managing Director, Reservoir Road Wealth Management at Stewart Partners. Thank you so much for being with us. So let's just start with the big picture in short-term bond positioning and ETFs and the correlation.

Ken Roban (0:22)

That's great. First of all, Nicole, thank you so much for having me here. It's great to chime in. The big picture, quite frankly, Nicole, is that, first of all, Wall Street is really, really great at coming up with acronyms that define the current moment that we're in. One of the acronyms that you're probably familiar with is Tina, which stood for there is no alternative. That era has ended, and now we're in an era that I call Tara. That one hasn't really caught on quite yet.

You could think of Tara as Tina's sister, but what Tara really stands for is there are reasonable alternatives.

The important point is that in my view, equities have been terrific, but investors are still investing like we're in a Tina world.

If you look at a bunch of indicators that are out there, you could see that equities still remain very, very popular. But if you look at the fixed income world, interest rates have obviously got up a lot. As your last guest just noted, the 10-year treasury is now at about 5 percent. I'm sure you've heard the term the lost decade, which really applied towards stocks in the early 2000 period. We've really just had a lost decade in bonds. We've gone from percent for short-term rates, and now you can put your money to work at really much better rates in the short-term. If you want to start being a little bolder with your portfolios, you can start going a little longer. You can now capture some of these yields. Yeah.

Nicole (2:10)

You talked about a laddered corporate ETF strategy. I would love to hear if you wanted to take a little more risk, how would you do that?

Ken Roban (2:17)

Sure. I think one of the great ETF products that's come out to the market over the last 10 years are the targeted maturity ETFs. And they really act a little bit like individual bonds, except you can get a lot more diversification. So targeted ETFs in particular, you could find them in the corporate bond market world. You could actually apply them to high yield and municipal bonds as well. So really, what do we do as financial advisors? We create financial plans. Each individual client has some kind of targeted risk profile. They have a return profile that they need to hit in order to make their financial plan work, in order to make all their goals and dreams really come alive. And the targeted maturity ETFs can really help. So for example, in corporate bonds, that's really the sector that I like a lot right now. You could create your own ladder that's customized to fit whatever goals your client is going to need.

Currently, a one-year targeted maturity corporate bond ETF yields around 4%.

You can get up to 5.88% if you want to go all the way up to 10 years, and we're creating ladders that go out to 10 years depending on the client and depending on their tolerance for risk.

Nicole (3:46)

You also have another focus ETF that actually has a balance of both equities and fixed income. Tell me about that. When you look at INCM, it balances some of the high quality dividend paying equities in there and fixed income, right?

Ken Roban (4:03)

Yeah, I think it's a great strategy. It's actually a relatively new ETF. I think it's come on the market over the last three or four years, but it's really the ETF incarnation of a very, very old strategy.

It's the Franklin Income Focus Fund, as you just put up on the screen. And what they're very, very good at is identifying where and when, and I think the when is very, very important, when certain sectors of the income world are attractive and when certain sectors of the income world are unattractive. So right now, it got about 50% in stocks, 50% in bonds, mostly in corporate bonds. But as you could see, they changed that allocation over time, and they're really, really very good at controlling risk and maintaining a pretty high level of income and a relatively low level of volatility. I think it's an excellent strategy for many investors.

Nicole (5:02)

Yeah. I mean, there are so many different instruments in there. It's not even just stocks and bonds, it's also mortgage-backed securities, and as you noted right now, it's split 50-50. So it really is a very interesting way to play the market as things change and move. You could be more heavily invested in one over the other, and you don't have to make the decisions.