Broadly speaking, the following asset classes are those that WiseBanyan analyzes for its portfolios:
U.S. Equities (Stocks) represent a claim of ownership in corporations based in the United States. Despite the slump in US Equities in 2008-2009, we have seen strong growth of the economy in the United States in the 20th century as well as the beginning of the 21st. Indeed, U.S. stocks have already made up all losses experienced during the recent financial downturn. Increasingly, U.S. corporations are conducting more business overseas, so they tend to benefit from growth in international developed and emerging markets.
To give investors access to U.S. equities, we use the Vanguard Total Stock Market ETF: VTI. For the purpose of WiseHarvesting, we also use the Schwab U.S. Broad Market ETF: SCHB and the State Street SPDR S&P 500 ETF: SPY.
Foreign Developed Market Equities (Stocks) represent a claim of ownership in foreign corporations based in developed nations (e.g. Europe, Japan, etc.). Foreign Developed Markets have experienced hardship of their own; however, they remain an integral part of the world economy. Similar to U.S. corporations, many foreign corporations have global reach and benefit from the growth of the world economy.
To give investors access to international equities, we use Vanguard FTSE Developed Markets ETF: VEA. For the purpose of WiseHarvesting, we also use the Schwab International Equity ETF: SCHF and the iShares MSCI EAFE ETF: EFA.
Emerging Market Equities (Stocks) represent `a claim of ownership in foreign corporations based in the world's developing economies (e.g. Brazil, Taiwan, South Africa, China, India, etc.). As a whole, Emerging Markets represent approximately half of the world GDP, although this figure is expected to grow as they further develop. While Emerging Market Equities are considered more volatile, they experience fast economic growth, and are expected to generate higher returns than the equities of their developed counterparts.
To give investors access to international emerging equities, we use Vanguard FTSE Emerging Markets ETF: VWO.For the purpose of WiseHarvesting, we also use the iShares Core MSCI Emerging Markets ETF: IEMG and the iShares MSCI Emerging Markets ETF: EEM.
U.S. Government Bonds are debt securities issued by the federal government and its agencies. These debt securities are used by the government to fund new or existing projects. Unlike equities, U.S. Government Bonds provide steady income in the form of interest and principal payments. U.S. Government Bonds are considered some of the safest investments in the world. While the returns can be far less than stocks, they provide good diversification and steady income to investors. In addition, Short Term U.S. Government Bonds have the added safety of minimizing interest rate risk, though they do yield less than intermediate or longer term bonds.
To give investors access to U.S. government bonds, we use Vanguard Intermediate Term Government Bond Index ETF: VGIT.
To give investors access to short term U.S. government bonds, we use Vanguard Short-Term Government Bond Index ETF: VGSH.
Investment Grade Corporate Bonds are debt securities issued by U.S. based corporations for the purpose of funding new and existing business activities; essentially they represent money that has been lent to U.S. companies which the companies pay back with interest. Because corporations are subject to higher credit risk and illiquidity than U.S. Government Bonds, they produce higher yields. These bonds are issued by corporations rated as investment-grade – meaning that ratings agencies have determined their risk is among the lowest of corporate bonds.
To give investors access to investment grade bonds, we use iShares Investment Grade Corporate Bond ETF: LQD. For the purpose of WiseHarvesting, we also use the Vanguard Intermediate-Term Corporate Bond Index ETF: VCIT.
To give investors access to short term investment grade bonds, we use Vanguard Short-Term Corporate Bond ETF: VCSH.
Short Term High Yield Bonds are debt securities issued by U.S. corporations with a credit rating below investment grade. These securities generally have a higher yield than Investment Grade Corporate Bonds, and also carry a higher risk due to the credit worthiness of the issuers. Historically these securities have had more volatility of returns and have had a relatively high correlation with U.S. Equities. While all bonds carry credit risk – the risk the company will repay its debts – by investing in shorter duration bonds an investor can minimize exposure to additional risk in the form of interest rate fluctuations. By using Short Term High Yield Bonds, WiseBanyan seeks to minimize investors’ exposure and risk to a rise in interest rates.
To give investors access to short term high yield bonds, we use State Street Global Advisors Barclays Short Term High Yield Bond Index ETF: SJNK. For the purpose of WiseHarvesting, we also use the PIMCO 0-5 Year High Yield Corporate Bond Index ETF: HYS and the iShares 0-5 Year High Yield Corporate Bond ETF: SHYG.
Emerging Market Bonds are debt securities issued by the governments of developing nations. Historically, Emerging Market Bonds have faced higher instances of default than those of developed nations; however, this additional default risk is countered by the higher yields they offer.
Currently, we do not include emerging market bonds in our investor portfolios. This is because our model and investment process has determined that money is better allocated to emerging market equities and U.S. bonds. Were we to include this in our portfolio, we would use iShares USD Emerging Markets Bond Fund ETF: EMB
Municipal Bonds are debt securities issued by U.S. State and local governments for the purpose of funding new and existing public works projects. All interest earned from Municipal Bonds is exempt from federal income taxes, making municipal bonds attractive investments for investors in high-tax brackets. However, this tax benefit becomes irrelevant for IRA and tax deferred accounts.
Currently, we do not include municipal bonds in our investor portfolios. This is because our model and investment process has determined that money is better allocated to U.S. corporate bonds. Were we to include this in our portfolio, we would use iShares Municipal Bond ETF: MUB.
Treasury Inflation-Protected Securities (TIPS) are bonds issued by the federal government that are protected against inflation. As TIPS are inflation-indexed, their principal and coupon payments are adjusted against the Consumer Price Index (CPI). Because TIPS eliminates the inflation risk of nominal bonds, they earn lower yields than their non-protected counterparts.
To give investors access to TIPS, we use iShares Barclays TIPS Bond Fund ETF: TIP.
Real Estate Investments are U.S. real estate investment Trusts (REITs) holding both commercial and residential properties. While REITs may hold inherent risk of non-payment, they provide two major benefits. First rents increase with rising inflation, REITs protect investors against inflationary movements. Second, as prices rise either due to inflation or due to active management of the portfolio of properties, investors benefit from appreciation in the price of the REIT. Finally, Real Estate investments provide an opportunity for increased diversification of an investor's holdings.
To give investors access to real estate investments, we use Vanguard REIT ETF: VNQ. For the purpose of WiseHarvesting, we also use the iShares U.S. Real Estate ETF: IYR and the iShares Cohen & Steers REIT ETF: ICF.
Natural Resources reflect prices of energy and natural materials (e.g. natural gas, crude oil, precious metals, wheat, etc.) The major benefits of natural resources are similar to those of Real Estate, as Natural Resources provide inflation protection as well as the benefits that accompany a more diversified holding. Natural Resources investments are not subject to the capital gains tax until they are settled.
Currently we do not include natural resources in clients’ portfolios. This is due to the fact that, though prices of natural resources may rise, it becomes difficult to capture that price appreciation due to the cost of ownership and storage of natural resources. A natural resource ETF sponsor will need to use futures to gain exposure to natural resources, and futures are influenced not only by price movements but also by the cost of storage of the commodities. We find it better to offer clients inflation protection by using TIPs and real estate, as returns from natural resource ETFs have been quite poor. Were we to include natural resources in clients’ portfolios, we would use iShares GSCI Commodity-Indexed Trust ETF: GSG.