Our Picks

Top Picks for Year-End Rebalancing

Susan Dziubinski

For many investors, reviewing the asset allocations of their portfolios sounds about as appealing as a visit to the dentist. Moreover, given the market volatility we've experienced of late, some may argue that the market is doing their rebalancing for them this year.

Which raises the question: Is rebalancing necessary, especially this year?

"If you're in your 30s or 40s and you think you have at least 20, 25 years until retirement, you should want to see these periodic market sell-offs, because you want to hold a mostly equity heavy portfolio at that life stage," says Morningstar director of personal finance Christine Benz. "You probably shouldn't do a lot of shifting around in terms of your portfolio's asset class exposures."

However, if you're nearing retirement--someone older than 50 and getting within 10 to 15 years of retirement--Benz suggests taking a hard look at your asset mix.

"It's been very easy to be hands off as the market has been rising pretty steadily over the past decade," she observes. "If you haven't made any changes recently, you still might actually be equity heavy relative to an appropriate target."

To Benz's point, the S&P 500 is up about 11% per year for the trailing five-year period. Meanwhile, the Bloomberg Barclays U.S. Aggregate Bond and MSCI indexes are each up just 2% annually over that same stretch. As such, investors may find that their portfolios are light on bonds and international stocks.

If you already own a solid bond or an international fund, it may make most sense for you to jettison some dollars from elsewhere in your portfolio to these existing holdings rather than initiate new positions. But if not, here are a few mutual fund and ETF ideas to fill in the gaps.

Taxable Bond Funds to Consider
For bond-fund seekers looking for a solid core fund, we suggest plucking one from the intermediate-term bond category. Many of the funds in this category blend government bonds, mortgage-backed securities, and higher-quality corporate debt; some even dabble a bit in lower-quality fare. These funds therefore provide a lot of diversification in a single holding, and as a result, don't court excessive interest-rate or credit risk.

Benz uses three intermediate-term bond funds across her various model portfolios for retirees and savers. Harbor Bond (HABDX), which earns a Morningstar analyst rating of Gold, is the choice for Bucket 2 of her mutual fund portfolios for retirees. Subadvised by PIMCO, Harbor Bond benefits from the firm's significant resources, blending PIMCO's well-regarded macro forecasting with bottom-up analysis. Modest expenses seal the deal.  

Silver-rated  iShares Core Total USD Bond Market ETF (IUSB) fills the intermediate-term bond role in Benz's ETF-focused portfolios for retirees and retirement savers. This passively managed portfolio provides exposure across the entire credit spectrum. Because the portfolio is market-cap weighted, it includes significant exposure to the highest-quality bonds, which makes the fund a little more vulnerable to interest-rate movements than other intermediate-term bond choices.

Gold-rated Metropolitan West Total Return Bond (MWTRX) is a holding in Benz's model mutual fund portfolios for retirement savers. Actively managed by value investors looking to buy bonds when they're cheap and sell when they get expensive, the fund has done an excellent job of taking advantage of market dislocations over the long term.

In addition to those already mentioned, seven other mutual funds in the intermediate bond category earn Morningstar fund analyst ratings of Gold: Dodge & Cox Income (DODIX),  Fidelity Total Bond (FTBFX), Loomis Sayles Core Plus Bond (NERYX), Loomis Sayles Investment Grade Bond (LSIIX), PIMCO Total Return (PTTRX), Western Asset Core Bond  (WATFX), and Western Asset Core Plus Bond (WACPX).

No ETFs in the intermediate-term bond category earn Gold ratings, but several--including Schwab US Aggregate Bond ETF (SCHZ) and Vanguard Intermediate-Term Bond ETF (BIV) among them--earn Silver analyst ratings. (Premium Members can access a complete list of all Medalist mutual funds and ETFs here.)

Foreign-Stock Funds of Note
When it comes to international fare, we suggest using a well-diversified, large-cap focused fund as the core; you'll find such funds in Morningstar's foreign large blend category. These funds generally provide exposure to foreign large-caps with both growth and value characteristics, and include some smaller companies and emerging-markets stocks, too.

Gold-rated American Funds International Growth and Income (IGIFX) helps fill Bucket 3 of Benz's model portfolio for retirees. The fund, which is available via some no-transaction-fee networks, favors dividend payers overseas; it's therefore a sensible way for those in retirement to get some exposure to international stocks.

For her retirement saver portfolios, Benz opts for Gold-rated Vanguard Total International Stock Index (VTIAX). Tracking the FTSE Global All Cap ex US Index, this fund includes companies of all sizes from more than 40 developed and emerging markets, making it among the most comprehensive portfolios in the foreign-large blend category. It's among the lowest cost choices, too. Given the index's construction, the fund has consistently overweighted Japanese stocks, which has hurt returns compared to its peers.

Among ETFs, Benz uses Silver-rated Vanguard FTSE Developed Markets ETF (VEA) in her Retirement Saver portfolio and Gold-rated Vanguard Vanguard FTSE All-World ex-US ETF (VEU) in Bucket 3 of her model portfolios for retirees. The former fund tracks the FTSE Developed All Cap ex-US Index, which covers stocks of all sizes from 23 foreign developed markets; the portfolio features many multinationals with globally diversified operations. The latter fund differs from the former by including stocks from developing markets, too.

Other Gold-rated funds in the Foreign Large Blend category include  iShares Core MSCI Total International Stock ETF (IXUS), Oakmark International (OAKIX) , Artisan International Value (ARTKX), and Vanguard FTSE All-World ex-US Index (VFWAX). Note that some of these funds have purchase restrictions; they're either closed to new investors or only available directly from the fund company.

Susan Dziubinski does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.