Tax-Deferred ESG Retirement-Bucket Portfolios for ETF Investors

Mirroring a trend in the broader mutual fund universe, passively managed funds managed in accordance with environmental, social, and governance factors are growing in number. As a result, it is now fairly simple to create a well-diversified portfolio consisting of securities with good ESG attributes at a very low cost.

The portfolios featured below are geared toward retirees’ tax-deferred accounts that they are actively drawing upon to provide them with cash flows.

About the Portfolios

These model portfolios are geared toward retired investors who are drawing upon their tax-deferred accounts to meet a portion of their living expenses. Bucket 1 of each portfolio is to provide money for cash needs for a year or two, so we’re not taking any risks with it; investors can use some combination of certificates of deposit, high-yield savings accounts, or money market mutual funds for this portion of the portfolio. (Cash investors who would like to make sure their holdings align with ESG principles might consider BlackRock Liquid Environmentally Aware Fund LEAF, a money market fund.) Bucket 2 covers another eight years’ worth of cash flow needs. It’s designed to deliver slightly more income than Bucket 1, as well as a dash of inflation protection and capital appreciation; thus, it consists mainly of high-quality short- and intermediate-term bonds. Bucket 3 is the growth engine of each of the portfolios, geared toward years 11 and beyond of retirement.

The portfolios consist exclusively of funds that rate as Morningstar Medalists, meaning our analysts think they’re likely to outperform their peers over a full market cycle. I’ll make changes to the holdings only if their fundamentals change or they no longer rate as medalists. My ESG exchange-traded fund portfolios are designed to limit tracking error relative to broad market indexes. As such, they’re less “ESG-forward” than their mutual fund counterparts.

Because there aren’t yet ESG-focused ETFs for every nook and cranny of the bond market, I had to finesse the fixed-income exposures in Bucket 2. I used iShares ESG U.S. Aggregate Bond ETF EAGG to provide core exposure; it should deliver performance that closely resembles its “parent” index, in this case the Bloomberg Barclays U.S. Aggregate Bond Index, with an emphasis on ESG characteristics. Beyond that core exposure, though, ESG bond options are sparse. For short-term exposure, I relied on iShares ESG 1-5 Year USD Corporate Bond ETF SUSB. However, an investor who isn’t comfortable with the credit risk inherent in a corporate-bond-heavy fund like that one could reasonably use a short-term U.S. government-bond fund such as iShares Short Treasury Bond ETF SHV or Vanguard Short-Term Treasury ETF VGSH. After all, U.S. government bonds figure prominently in most core ESG bond funds, so an ESG investor could reasonably focus her fixed-income exposure, or a portion of it, on such bonds. Using that same logic, I used iShares TIPS Bond ETF TIP to provide inflation protection. (Treasury Inflation-Protected Securities are not a component of Bloomberg Barclays Aggregate indexes.)

How to Use Them

Note that the goal of these portfolios isn’t to generate the best returns of any retirement portfolio on record but rather to help retirees and pre-retirees visualize what a long-term, strategic total-return portfolio would look like. Thus, a newly retired investor could follow the basic Bucket concept without completely upending existing favorite holdings.

Investors should take care to customize their portfolios to suit their own situations—risk tolerance and capacity, of course, but also planned spending. Investors’ cash buckets, and in turn the allocations to their other two buckets, will depend on their portfolio spending rate. If an investor is using a lower starting withdrawal rate—say, 3% in the first years of retirement—Bucket 1 would accordingly be smaller (6% versus 8% in my Aggressive portfolio).

Bucket Portfolio Allocations

These portfolios are designed to help retirees and pre-retirees visualize what a long-term, strategic total-return portfolio would look like.

Aggressive Tax-Deferred ESG Retirement-Bucket Portfolio for ETF Investors

Anticipated Time Horizon in Retirement: 25-plus years

Risk Tolerance/Capacity: High

Target Stock/Bond/Cash Mix: 60%/32%/8%

Bucket 1

• 8%: Cash

Bucket 2

• 8%: iShares ESG 1-5 Year USD Corporate Bond ETF SUSB
• 8%: iShares TIPS Bond ETF TIP
• 16%: iShares ESG U.S. Aggregate Bond ETF EAGG

Bucket 3

• 35%: iShares ESG Aware MSCI USA ETF ESGU
• 5%: iShares ESG Aware MSCI USA Small-Cap ETF ESML
• 15%: iShares ESG Aware MSCI EAFE ETF ESGD
• 5%: iShares ESG Aware MSCI Emerging Markets ETF ESGE

Moderate Tax-Deferred ESG Retirement-Bucket Portfolio for ETF Investors

Anticipated time horizon in retirement: 15-25 years

Risk Tolerance/Capacity: Moderate

Target Stock/Bond/Cash Mix: 50%/40%/10%

Bucket 1

• 10%: Cash

Bucket 2

• 10%: iShares ESG 1-5 Year USD Corporate Bond ETF SUSB
• 10%: iShares TIPS Bond ETF TIP
• 20%: iShares ESG U.S. Aggregate Bond ETF EAGG

Bucket 3

• 30%: iShares ESG Aware MSCI USA ESGU
• 5%: iShares ESG Aware MSCI USA Small-Cap ETF ESML
• 12%: iShares ESG Aware MSCI EAFE ETF ESGD
• 3%: iShares ESG Aware MSCI Emerging Markets ETF ESGE

Conservative Tax-Deferred ESG Retirement-Bucket Portfolio for ETF Investors

Anticipated time horizon in retirement: Fewer than 15 years

Risk Tolerance/Capacity: Low

Target stock/bond/cash mix: 40%/48%/12%

Bucket 1

• 12%: Cash

Bucket 2

• 13%: iShares ESG 1-5 Year USD Corporate Bond ETF SUSB
• 13%: iShares TIPS Bond ETF TIP
• 22%: iShares ESG U.S. Aggregate Bond ETF EAGG

Bucket 3

• 23%: iShares ESG Aware MSCI USA ESGU
• 5%: iShares ESG A3ware MSCI USA Small-Cap ETF ESML
• 10%: iShares ESG Aware MSCI EAFE ETF ESGD
• 2%: iShares ESG Aware MSCI Emerging Markets ETF ESGE