Looking to build a retirement portfolio? One of the simplest and cheapest ways to build a long-term portfolio is using ETFs. These funds allow you to get exposure to the entire stock market and easily diversify across asset classes.
In this guide, we’ll explain why you should consider using ETFs to build your retirement portfolio and highlight some of the best ETFs for retirement. So if you’re looking to start investing for retirement, now’s the time. Let’s get started!
What is an ETF?
An ETF, or exchange-traded fund, is a basket of stocks that trades on the stock exchange.
You can buy and sell ETFs just like you would buy and sell individual stocks. However, when you invest in an ETF, you’re really investing in an array of holdings that could include anywhere from a few dozen stocks to thousands of different stocks.
In addition, ETFs can contain assets other than stocks, such as bonds or real estate.
ETFs vs. Mutual Funds
ETFs have a lot in common with mutual funds, which are also baskets of assets. The main difference is that ETFs trade publicly on stock exchanges, whereas mutual funds are operated privately (typically by a brokerage or private investment firm).
This difference has important implications. ETFs are often available from any US broker, not only the firm that launched the fund. Equally important, ETFs tend to come with lower management fees and no investing minimums. Mutual funds, on the other hand, often require you to meet a threshold investment when you first buy into a fund.
How Do ETFs Fit into a Retirement Portfolio?
ETFs are an excellent investment choice for many retirement portfolios. One of the biggest reasons why is that they enable you to invest in a wide range of stocks and other assets with just a single trade. So, you can build a diversified portfolio that includes hundreds or thousands of different stocks, bonds, and more with just a handful of open positions.
Another nice thing about ETFs is that they are managed for you by professionals. Thanks to that, you don’t have to worry about the holdings in the fund falling out of balance over time. While ETFs do have annual management fees, these tend to be relatively inexpensive (typically less than 1%, and often less than 0.25%).
How to Use ETFs to Diversify
You can use ETFs to diversify your retirement portfolio in several different ways.
First, you can use ETFs simply to split up your portfolio among different assets classes. For example, you can invest 80% of your savings in stock ETFs and the remaining 20% in bond ETFs. As you approach retirement, you may want to shift your investments to 60% stock ETFs and 40% bond ETFs to minimize risk.
You can also use ETFs to spread your investments across risk categories within the stock market. You can invest in a mix of US and international ETFs, for example, or invest in a large-cap ETF and an ETF that seeks out market-beating gains from up-and-coming stocks. Make sure to match your allocation to your risk tolerance – it’s a good idea to place around 80% of your stock investment in a lower risk ETF that tracks the broader market.
What to Consider When Choosing an ETF
There are a few key aspects to consider when choosing an ETF. To start, think about what assets or market sectors you want exposure to. Some assets and some sectors are more volatile than others or offer better performance under different market conditions. It’s also important to make sure that, if you invest in multiple ETFs, they don’t overlap too much.
It’s also important to look at the management fees that an ETF charges. This is also known as a fund’s expense ratio. Low-cost funds that track a market index can have expense ratios below 0.10%, while funds that hold international stocks or actively trade positions inside the fund can have expense ratios between 0.50% and 1.0%.
Keep in mind that the portfolio you build now might need to change over time as your risk tolerance changes and retirement grows closer. For example, it might make sense to invest primarily in stocks when you are in your 20s and 30s, and to gradually switch towards bonds or low volatility ETFs as you get older.
Best ETFs for Retirement
To help you find the best ETFs for retirement, we’ll highlight 11 of the best funds on the market today. Consider these ETF recommendations a starting point for your research – every investor’s goals are different, especially when it comes to retirement. So, you should always do your own research to create a portfolio that’s tailored to your needs.
Best Broad Market ETFs
Vanguard 500 Index Fund ETF (VOO): This ETF is one of the largest funds in the US, with over $658 billion in assets under management. The fund mirrors the performance of the S&P 500 and contains the 509 largest US stocks by market cap.
- Expense ratio: 0.03%
- 5-year return: 15.18%
Schwab Total Stock Market Index ETF (SWTSX): This inexpensive ETF represents nearly all publicly traded stocks on the NASDAQ and NYSE. Nearly one-quarter of the fund is comprised of the top 10 holdings, but the ETF includes thousands of small-cap stocks in addition to S&P 500 constituents.
- Expense ratio: 0.03%
- 5-year return: 17.34%
iShares Russell 3000 ETF (IWV): This ETF seeks to track the Russell 3000 and includes over 2,850 constituent stocks. Around 23% of the fund is invested in the top 10 holdings, including Microsoft, Amazon, and Apple.
- Expense ratio: 0.20%
- 5-year return: 15.24%
Best Bond ETFs
iShares Core U.S. Aggregate Bond ETF (AGG): This ETF is currently the largest US bond fund, with nearly $85 billion in assets under management. The fund invests in a wide range of bonds, including state and federal bonds, mortgage debt, and investment-grade corporate bonds. It has more than 8,000 holdings and offers a yield of 2.4%.
- Expense ratio: 0.04%
- 5-year return: 4.38%
Vanguard Intermediate-Term Corporate Bond ETF (VCIT): This bond ETF focuses on mid- and large-cap companies with strong financials, who nevertheless borrow at slightly elevated interest rates relative to US treasuries. The 10- to 20-year horizon of the bonds adds to the yield, which is currently sitting at 3.1%.
- Expense ratio: 0.05%
- 5-year return: 6.34%
Best Dividend ETFs
ProShares S&P 500 Aristocrats ETF (NOBL): This ETF invests in a selection of 65 ‘dividend aristocrats’ – companies that have grown their dividends for at least 25 consecutive years. The fund only invests in stocks on the S&P 500, and it offers an average dividend yield of 2.4%.
- Expense ratio: 0.35%
- 5-year return: 12.79%
iShares International Select Dividend ETF (IDV): This international ETF is a good option for investors who want to diversify away from American stocks. The fund holds over 90 stocks from the UK, Europe, South Africa, Canada, and Australia, and pays out an average yield of 7.1%.
- Expense ratio: 0.49%
- 5-year return: 6.05%
Best Global Market ETFs
Vanguard FTSE Developed Markets ETF (VEA): This ETF is one of the cheapest options for building a global portfolio. With an expense ratio of just 0.05%, the fund offers exposure to 4,000 large-cap stocks from around the world. The fund focuses on well-established companies, which makes it less volatile than other international ETFs.
- Expense ratio: 0.05%
- 5-year return: 8.30%
iShares MSCI Frontier 100 ETF (FM): This ETF is a significant step up in risk. It invests not in maturing markets like China and Brazil, but rather in countries that are only beginning to see major investment from the West. The 151 holdings are focused in places like Kuwait, Vietnam, Morocco, and other far-flung locations with relatively tiny stock markets.
- Expense ratio: 0.79%
- 5-year return: 5.76%
Best Low Volatility ETFs
iShares MSCI USA Min Vol Factor ETF (USMV): This ETF invests in US stocks that experience less volatility than the overall market. It has 174 holdings, most of which are large-cap and blue-chip stocks in resilient industries. In the past, USMV has declined less than the major US stock indices during downturns.
- Expense ratio: 0.15%
- 5-year return: 12.45%
Invesco S&P MidCap Low Volatility ETF (XMLV): This US ETF tracks low volatility mid-cap stocks, and over half of the fund is exposed to the conservative real estate, utilities, and financials industries. The fund also seeks to reduce volatility by holding a selection of 80 stocks to spread out investment risk.
- Expense ratio: 0.25%
- 5-year return: 10.33%
Conclusion: ETFs for Retirement
ETFs can form the base of your retirement portfolio or can help you diversify your existing portfolio. They enable you to easily invest in a wide range of stocks or other assets and typically don’t cost very much. The 11 ETFs we highlighted offer a starting point to help you build a long-term portfolio, but be sure to do your own research to find the funds that best suit your needs.