Exchange-traded funds (ETFs) are one of the most efficient ways to diversify your retirement portfolio. ETFs provide passive, diversified exposure to a particular market index, sector, or topic. Dividend ETFs can also be a great way to earn low-risk income, especially with interest rates close to record lows. Actively managed mutual funds may not be able to outperform the market for a long period of time, so paying additional fees and expense ratios may not be worth it.Instead, consider passively managed mutual funds or ETFs.
Both may have a place in your portfolio, but due to their ease of buying and selling and, possibly, more favorable tax treatment, many IRA investors are finding that ETFs are better suited to their goals and objectives than mutual funds. ETFs offer tax efficiency due to their structure; however, this is not a relevant feature in a tax-deferred retirement plan such as a 401(k).ETFs are similar to mutual funds. If your 401(k) options include an ETF (or any investment fund) that you think is a good choice, there's no reason not to choose it. When investing in retirement, you may not have the same energy and interest to study stocks and other investments, and carefully decide what to buy and when, and then when to sell.
Your abilities may also decrease over time. Therefore, consider investing in exchange-traded funds (ETFs) with a portion or a large portion of your retirement money.In reality, just one ETF might be all you need to retire; however, here are a few you should consider. The Vanguard S&P 500 ETF (VOO -2.16%), with its extremely low annual fee (also known as the expense ratio) of 0.03%, is a great place to start and could be all you need. An ETF is essentially a fund that is traded like a stock; therefore, you can easily buy just one stock through your brokerage agency and you can sell it at any time, although holding out for decades is a good way to aim for long-term financial security.When you buy stocks, your dollars will be distributed among most of the approximately 500 stocks in the S&P 500 index, which focuses on the largest US companies.
The index contains only 500 of the thousands of stocks in the United States but together they represent about 80% of the total value of the stock market. Many people consider the S&P 500 to be a reference point for the US stock market or more precisely for large cap stocks in the United States.With this and other funds you're considering, do some research on them to see what exactly they own and how much they charge in fees, etc. In general, index funds (funds that track several indices) have very low fees. The top 10 stocks in the index, for example, which include Apple, Microsoft and Amazon, account for about 29% of its total value because the index is weighted by market capitalization; meaning companies with the highest market value have an enormous influence on the value of the index.You can imagine that the last 100 or even 200 shares represent a small part of the value of the index; however, you can solve this by investing instead in an equally weighted S&P 500 fund such as the Invesco S&P 500 Equal Weight ETF although its long-term performance has lagged behind the Vanguard S&P 500 ETF.
An S&P 500 index fund is fantastic but it doesn't exclude the many smaller companies in the United States such as Kohl's, Mattel, The New York Times, Harley-Davidson and home builder Toll Brothers.If you want your financial wealth to be linked to almost every company on major US stock exchanges consider investing in a total US stock ETF such as the Vanguard Total Stock Market ETF (VTI -2.06%). This ETF has an ultra-low annual fee of 0.03%, which isn't surprising since it's a Vanguard fund and Vanguard is known for its low fees.You can go even further and distribute your money in world stock markets with a total global stock ETF such as the Vanguard Total World Stock ETF (VT -1.42%). Its main holdings are very similar to those of the first two previous ETFs but among them you will also find companies such as Taiwan Semiconductor China's Tencent Holdings and Toyota Motor like another Vanguard fund it has an extremely low annual fee of only 0.07%.As a retiree you may especially appreciate an index fund that pays dividends; the above do but you'll get a higher payout from an ETF that focuses specifically on dividends such as the Vanguard Dividend Appreciation ETF (VIG -1.72%). While the Vanguard S&P 500 ETF recently showed a dividend yield of 1.34%, the Vanguard Dividend Appreciation Fund achieved a return of 1.74%.
Its annual share was also only 0.06%. One advantage of dividends is that they tend to be paid faithfully no matter how the stock market goes and healthy growing dividend payers will increase their payments regularly.This ETF aims to replicate the performance of the S&P Dividend Growers index minus its small fees of course; that index focuses on companies that have been consistently paying dividends usually for at least 10 consecutive years.
