Building My Roth IRA With An ETF Portfolio That Pays Monthly (2024)

I first floated the idea of funding a Roth IRA in February, but due to some unforeseen and some not-so-unforeseen circ*mstances (CFA exam fees and study materials, sudden car problems/new lease payments), I put it on the back-burner. As of this month, however, I've finally begun to fund it, and I'd like to share it (as well as expose it to some constructive criticism) with the Seeking Alpha community.

My goal is the same as it was in my last article, which is to build a "worry free" global equity portfolio with low-cost exchange-traded funds, coupled with some core bond holdings to help smooth out volatility and build a solid source of income.

The U.S. equity portion

The last time around, I chose a "total stock market" fund for the domestic allocation in this portfolio. After some more thinking, I decided to instead buy three separate funds, including:

1. The WisdomTree LargeCap Dividend Fund (DLN)
2. The WisdomTree MidCap Dividend Fund (DON)
3. The WisdomTree SmallCap Dividend Fund (DES)

The fees will be admittedly higher than keeping it simple and buying a low cost Vanguard total market or S&P 500 fund, but I think it's worth it. This is because the WisdomTree funds I've selected pay monthly, and weightings aren't selected by market cap, but rather by the amount of dividends each company pays.

I like this concept because I believe dividends are often the "window into the soul" of a company. The monthly payments also appeal to me because compounding will work faster and the dividend payments from these funds will be more like a real dividend growth portfolio, as opposed to only one fund that pays quarterly.

To top off my domestic equity allocation, I also wanted to add some growth into the mix. To accomplish this, I selected the Vanguard Growth ETF (VUG), which contains some more aggressive, growth-oriented names like Facebook (FB), Gilead (GILD), Disney (DIS), Google (GOOGL), and Amazon (AMZN). This fund pays a small dividend quarterly, but I'm not buying this fund for yield, but rather capital appreciation over the long-term. The expense ratio for this fund is rock-bottom as well at only 0.09%.

I'll also be adding the Vanguard REIT Index ETF (VNQ) to gain some real estate exposure and increase the portfolio's overall yield. The expense ratio is just 0.12%, and its quarterly payments currently equate to a yield of around 3.86%.

International exposure

For my international equity exposure, I'm still going with the same funds I selected in February, equally weighting the Vanguard FTSE Developed Markets ETF (VEA) and the Vanguard FTSE Emerging Markets ETF (VWO).

VEA carries a low expense ratio of 0.09% and VWO's expense ratio is also reasonable at 0.15%. Both funds pay quarterly, and both currently yield about 2.82%. About 42% of the VEA fund is allocated to the U.K. and Japan, with another 16% allocated to Germany and Switzerland, and I view these as solid, stable countries that comprise a large amount of the fund.

While Europe is looking bad at the moment and emerging economies like China (about 27% of the VWO fund) even worse, I still want long-term exposure outside the States and I think these funds give me a lower-risk way of accomplishing this goal. Dollar cost averaging should help alleviate some of the pain that could possibly occur if I were to instead put a bunch of money into these funds all at once as well.

Now the controversial part: Adding bonds

Yes, I am adding bonds, despite interest rate risk. The funds I'm adding pay monthly, and I'll be DCA into them slowly, instead of buying a bunch of them all at once. The two bond funds I'll be utilizing for this purpose consist of the Vanguard Total Bond Market ETF (BND) and the iShares 20+ Year Treasury Bond ETF (TLT).

BND's expense ratio is only 0.07%, and TLT's is 0.15%. While some investors shudder at buying long-dated treasuries right now, I think adding a small allocation couldn't hurt, and might even help provide a little bit of a buffer if global fear starts to set in. Yields are a lot lower in other countries, so they can always go lower. Still, I will acknowledge there's very real interest rate risk in long bonds, which is why I'll be allocating more to BND for the fixed income portion of my portfolio. The fund's average effective duration is only about 5.7, indicating less rate-risk. It also only allocates funds to investment grade bonds.

Conclusion

I'll start to dollar cost average into these 9 funds weekly, and looking at the intended allocation using a "back-of-the-envelope" calculation, the portfolio should look like this by the time I've maxed out my Roth IRA for the year:

The overall asset allocation will look like this:

The portfolio's overall yield will be roughly 2.7% using today's current yields, although this will likely fluctuate as global markets move around and/or we get a rate hike by the fed some time this year. Over half the dividends and income will come from the monthly paying funds.

While some of you may be asking why I'm willing to pay so much in trading fees by buying these funds every week, I should disclose that I'm using CapitalOne Investing's platform, and I'm "grandfathered" in from the days when it was called Sharebuilder and owned by ING. This allows me to pay $12/month for "free trades". In other words, I can DCA weekly, even in small amounts, without fees eating up my returns. That is unless I sell, which costs me about $7, but luckily I intend to buy and hold these funds for a very long time.

Any thoughts or constructive criticism? Please let me know in the comments section below.

Joseph Harry