Defensive Portfolio for High Income

"The broad asset mix in the high income portfolio will be up to 30% in equities and up to 70% in various types of bond funds and individual bonds when fully invested.

"When market conditions appear risky, or when we judge that it would be best to wait for better opportunities, the portfolio will maintain cash positions.

"Historically, a blend of the SPDR S&P Dividend ETF (SDY) and the WisdomTree Emerging Markets Equity Income ETF (DEM) have performed better on a risk-adjusted basis than either one of them did alone.

"The US high-yielding ETF emphasizes utilities, consumer staples, and industrials. The emerging markets ETF emphasizes materials, financials and telecom.

"Both ETFs yield approximately 4%, which is historically low for this type of portfolio, but is still above the average yield of 1.9% for the S&P 500 index and the estimated 1.6% for the MSCI Emerging Markets index.

"Because our equity models remain predominantly positive, our high income portfolio will start out with a full 30% equity position in these two ETFs.

"As the year progresses and our research uncovers individual stocks in solid financial condition with higher yields, the portfolio will shift its assets from these ETFs into individual stocks.

"Meanwhile, the run-up in high dividend stocks that occurred in November and December had reduced the yields on closed-end fund and preferred stocks to lower levels than I would like to see.

"Unlike high yield bond funds, the trading costs of buying and selling relatively illiquid closed-end funds and preferred stocks make it imperative to buy only when you would be satisfied with the yield on a long term basis, even if interest rates move higher.

"In addition, our investment grade corporate model is on a sell signal and yields on investment-grade bonds are also too low to be attractive. In this regard, cash is still king. As a result, the high income portfolio will start with a sizable cash position of 30% while we await higher yields down the road.

"The initial invested high yield fund positions in the high income portfolio will be Transamerica Aegon High Yield Fund (THYPX) for 30% of the portfolio and Nuveen High Yield Municipal Bond Fund (NHMAX) for 10% of the portfolio. Both of these funds yield approximately 7%"

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