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Investing Specialists

How Did the Bucket Portfolios Perform in the First Half?

Amid a 'risk-on' market, the most aggressive and stock-heavy portfolios performed best.

What a difference six months makes!

As 2019 dawned, my model bucket portfolios were limping away from a lackluster 2018. In a year punctuated by dual market shocks--interest-rate-related jitters in the first quarter and tariff/recession-related worries toward year-end--the portfolios’ cash holdings outperformed both the bond and stock positions. Stocks lost more than bonds, and aggressively positioned equity and bond holdings were particularly hard-hit.

Yet as is so often the case, market sentiment took a 180-degree turn shortly thereafter. In 2019’s first half, investors moved back into “risk on” mode, and everything that worked against the portfolios last year has buoyed them so far this year. The bucket portfolios all hold varying amounts of cash to help retirees meet their living expenses without having to sell equity or bond holdings. (This article details how the bucket approach works.) In the first six months of the year, cash returns were back in a familiar spot: the cellar.

As one would expect in such an environment, the Aggressive portfolios, which feature more than 50% of their assets in stocks, bested the Moderate and Conservative portfolios. But bonds performed exceptionally well, too, especially higher-risk bond holdings like  Loomis Sayles Bond  (LSBDX) and  Vanguard High-Yield Corporate (VWEAX).

Here’s a recap of my core mutual fund and exchange-traded fund bucket portfolios in the year’s first half: what worked, what didn't work so well, and any changes to the portfolios.

Aggressive Bucket Portfolio (Mutual Funds)
8%: Cash (I used Vanguard Prime Money Market (VMRXX) as a cash proxy for returns-tracking purposes in all of the portfolios)
8%:  Fidelity Short-Term Bond (FSHBX)
10%:  Harbor Bond  (HABDX)
7%:  Vanguard Short-Term Inflation-Protected Security (VTAPX)
10%:  Vanguard Wellesley Income (VWIAX)
10%:  Vanguard Total Stock Market Index (VTSAX)
24%:  Vanguard Dividend Appreciation (VDADX)
15%:  American Funds International Growth and Inccome  (IGIFX)
8%:  Loomis Sayles Bond  (LSBDX)

2019 Return (through June 30): 11.57%

Moderate Bucket Portfolio (Mutual Funds)
10%: Cash
10%: Fidelity Short-Term Bond
5%:  Fidelity Floating Rate High Income (FFRHX)
15%: Harbor Bond
10%: Vanguard Short-Term Inflation-Protected Securities
5%: Vanguard Wellesley Income
10%: Vanguard Total Stock Market Index
20%: Vanguard Dividend Appreciation
10%: American Funds International Growth and Income
5%: Loomis Sayles Bond

2019 Return (through June 30): 10.05%

Conservative Bucket Portfolio (Mutual Funds)
12%: Cash
12%: Fidelity Short-Term Bond
5%: Fidelity Floating Rate High Income
20%: Harbor Bond
11%: Vanguard Short-Term Inflation-Protected Securities
5%: Vanguard Wellesley Income
23%: Vanguard Dividend Appreciation
7%: American Funds International Growth & Income
5%: Loomis Sayles Bond

2019 Return (through June 30): 8.70%

Performance Recap: The portfolios enjoyed exceptionally strong gains, ranging from 9% to 12%, in the year’s first half. Vanguard Dividend Appreciation was the best performer in the portfolios, slightly outperforming the total market index thanks to its concentrated positions in  Microsoft (MSFT) and  Visa  (V). And while foreign stocks generally underperformed U.S. during the period, American Funds International Growth & Income held its own, landing in the top echelons of the foreign large-blend Morningstar Category. 

On the fixed-income side, more-conservative holdings delivered typically muted returns, while the more aggressive positions pitched in equitylike gains. Loomis Sayles Bond generated the highest return of any of the fixed-income holdings amid a surge in higher-risk bond types. Meanwhile, cash and short-term funds Vanguard Short-Term Inflation-Protected Securities and Fidelity Short-Term Bond brought up the rear. (Investors bid up long-term bonds with the expectation that the Federal Reserve would adopt a more accommodative position.)

Portfolio Changes: None.

Aggressive Bucket Portfolio (ETFs)
8%: Cash
7%:  Vanguard Short-Term Bond ETF (BSV
10%:  Vanguard Short-Term Inflation-Protected Securities ETF (VTIP
13%:  iShares Core Total USD Bond Market ETF (IUSB
28%:  Vanguard Dividend Appreciation ETF (VIG
13%:  Vanguard Total Stock Market ETF (VTI
15%:  Vanguard FTSE All-World ex-US ETF (VEU
3%: Vanguard High-Yield Corporate
3%:  iShares JP Morgan USD Emerging Markets Bond ETF (EMB) 

2019 Return (through 6/30): 11.84%

Moderate Bucket Portfolio (ETFs)
10%: Cash
7.5%: Vanguard Short-Term Bond ETF
12.5%: Vanguard Short-Term Inflation-Protected Securities ETF
7.5%:  SPDR Blackstone / GSO Senior Loan ETF (SRLN) (replaced in mid-June with Fidelity Floating Rate High Income)
15%: iShares Core Total USD Bond Market ETF 
22.5%: Vanguard Dividend Appreciation ETF
10%: Vanguard Total Stock Market ETF
10%: Vanguard FTSE All-World ex-US ETF
2.5%: Vanguard High-Yield Corporate
2.5%: iShares JP Morgan USD Emerging Markets Bond ETF

2019 Return (through 6/30): 10.16%

Conservative Bucket Portfolio (ETFs)
12%: Cash
13%: Vanguard Short-Term Bond ETF
15%: Vanguard Short-Term Inflation-Protected Securities
20%: iShares Core Total U.S. Bond Market ETF
6%: SPDR Blackstone / GSO Senior Loan ETF (replaced in mid-June with Fidelity Floating Rate High Income)
21%: Vanguard Dividend Appreciation ETF
7%: Vanguard FTSE All-World ex-US ETF
3%: Vanguard High-Yield Corporate Bond
3%: iShares JPMorgan USD Emerging Markets Bond ETF

2019 Return (through 6/30): 8.25%

Performance Recap: The performance of these three portfolios closely mirrors that of their mutual fund counterparts. As with the mutual fund portfolios, the Aggressive ETF Bucket Portfolio delivered the strongest gains, returning nearly 12%. (Its return was also slightly better than the Aggressive Mutual Fund Bucket Portfolio's during the period.) Meanwhile, the Conservative portfolio, which is geared toward older retirees and holds nearly two thirds of its portfolio in cash and bonds, delivered a smaller but perfectly respectable return of more than 8%.

One curious aspect of performance was that Vanguard Dividend Appreciation, the strongest-performing equity holding in the ETF portfolios in 2018, also delivered a knockout gain in 2019’s first half. Even as that fund’s focus on dividend-payers and its high-quality makeup helped limit losses in last year’s market rout, it has also fully partaken of this year’s rally. Top holdings Microsoft and Visa, each consuming more than 4% of assets, have pitched in particularly strong gains.

Portfolio Changes: The only change I made, as detailed here, was to swap out SPDR Blackstone / GSO Senior Loan ETF in favor of Fidelity Floating Rate High Income. The SPDR Blackstone ETF was downgraded to a Morningstar Analyst Rating of Neutral from Bronze based on its mediocre performance and a process that doesn't stand out relative to its category peers. I replaced it with Fidelity Floating Rate High Income, which is Bronze-rated. While the latter is not an ETF, there are currently no Morningstar Medalist ETFs in the bank-loan category. In a similar vein, there are no medalist high-yield bond ETFs, either, which is why I've employed Vanguard High-Yield Corporate in the high-yield slot in the ETF portfolios as well as in the mutual fund portfolios.

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Christine Benz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.