Vanguard recently ‘disrupted’ the land of retirement funding and one ticket ETFs. They released a one ticket retirement income ETF – ticker VRIF. The new release created quite a stir. It was a hit with bloggers and the greater financial press. Many Cut The Crap Investing readers were more than interested after I posted a review. Even our US readers asked where they could find a US listed equivalent. All said, monthly income funds and ETFs are nothing new. In fact the BMO monthly income ETF has been available from 2011.
So what’s the big deal with the Vanguard one ticket VRIF ETF?
The fund will create an income stream equal to 4% of the value of the ETF that you hold. If you hold $100,000 worth of VRIF, it will pay you out $4,000 annually, in monthly installments. Have a read of my VRIF review in that link (above) for further details and specifics. It is a great option, but it is certainly not a complete retirement solution.
It’s a hit with investors as they are obviously looking for simple and reliable income producing assets. VRIF uses a total return approach to retirement funding. It will sell a portion of the stocks and bonds to create income.
The BMO Monthly Income ETF also offers a monthly income stream. But that income is derived exclusively from income producing assets. The income will ‘come from’ dividends, bond income and covered call ETFs.
I had also looked at the BMO Monthly Income ETF with investing for income in 2019.
Total return or income?
For retirement funding from ETFs should you look to income producing assets or from more traditional ETF model portfolios? I will leave that up to you, but I certainly understand how and why many investors prefer to use ‘real income’.
I am in the hybrid camp. My research leads me to believe (or know) that the most reliable income stream is created from a mix of some generous and reliable income, in concert with a total return stream. I use Canadian stocks for more of the generous and reliable and growing dividend income stream. Our US stocks provide a mix of growing dividends, but the real income potential will be thanks to the incredible total returns. I have created homemade dividends by selling shares.
I also manage the stock market risks by way of Canadian and US bonds, as well as gold investments and more recently, some Bitcoin.
Investors might consider a healthy cash component as well.
That said, a VRIF or BMO’s ZMI might be a piece of the puzzle for many investors and advisors.
ETF assets and weightings for ZMI.
In my opinion the ETF offers a sensible mix with that obvious slant to income producing assets. The current yield available is 4.6% . Out of the gate, ZMI will deliver greater income compared to Vanguard’s VRIF.
And what about that yield history for ZMI? Here’s a chart courtesy of our friends from BMO ETFs …
We can see that the initial yield for the fund was an impressive 6%. It dipped below the 4% annual range in 2014 and into 2016. Of course the yield available at any time is affected by the share price for the ETF. For a period where the distribution remains constant, lower share prices will offer a greater current yield.
Also, from the earlier years, an investor in the ETF would have seen an income reduction. But recently we see some income stability. The ETF has been paying out .06 cents per unit from 2018. Keep in mind that neither the BMO Monthly Income ETF or Vanguard VRIF offer a guarantee of increasing income, or even stable income.
For those in the accumulation stage, here’s the total return chart for ZMI.
And the calendar year performance.
The income and total return combo.
You might be well served to pay attention to tax efficiency for monies in taxable accounts. The total return approach may be more suitable. And as always on the retirement planning front you may touch base with a fee-for-service financial planner. Retirement funding is often more than complicated and often requires the help of a specialist.
And for tax efficiency, you might consider Horizons Balanced one ticket ETF – HBAL. There are no distributions. Of course you would have to sell shares as required to create income.
You may decide to combine BMO’s ZMI with Vanguard’s VRIF for a set it and forget it stream of income. The income and total return combo would currently be above that 4% income level. And you may decide to use ZMI or VRIF as an income booster for your self-designed ETF portfolio. Many self-directed investors will also mix in individual stocks that pay generous dividends. In Canada, that often means leaning to REITS, banks, telcos, pipelines and utilities. Mathieu Litalien reports that a few of the Canadian utilities have been increasing their dividends each year for nearly 50 years.
And of course, I like to brag that of our 24 Canadian and US stocks, we’ve been treated to many dividend increases and no dividend cuts in 2020. So far, so good through the pandemic period. Quality wins when it comes to retirement funding.
Certainly Canadian energy stocks are out of favour these days.
How about you? Total returns, or income for retirement funding? Or perhaps you opt for a mix – that hybrid option? Please fire away in the comment section.
BMO’s discount brokerage.
On that BMO theme Cut The Crap Investing readers can sign up for BMO InvestorLine through this link.
And of course BMO also offers their own line up of one ticket portfolios.
To make your cash work a lot harder have a look at EQ Bank.
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