You can't just save money and expect to retire rich without being smart about how you invest it. For those who don't have the time, or inclination, to buy individual stocks, exchange-traded funds can be extremely useful in accumulating retirement savings, with diversified portfolios and low management costs helping to stretch your investing dollars as far as they'll go. The best ETFs combine these attractive features with solid exposure to growing markets. Depending on how you like to invest, any of the three ETFs below -- or a combination of all of them -- can help you build retirement wealth throughout your career.
1. Going with high-growth stocks
If you're like many people, maximizing the amount of growth in your portfolio is a key priority. Those who don't have a huge amount to invest have to make their investments work as hard as they can, and although being aggressive comes with added risk, the rewards can be substantial.
ETFs that focus on high-growth sectors of the market are a great way to turbocharge your portfolio's potential returns. For example, the Vanguard Information Technology ETF (VGT 1.68%) owns a variety of technology stocks, and it has produced a return of more than 21% annually over the past five years, topping the S&P 500 by almost 6 percentage points per year. Yet the ETF comes with annual expenses of just 0.10%, which is a fraction of the roughly 0.50% that typical ETFs in the same category would charge.
You can find similar sector ETFs in other high-growth industries. While you might not want to put all of your money in such aggressive investments, it can be a suitable way to invest for those who are just starting out or who have extremely high risk tolerance.
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2. Counting up your investment income
Conversely, as you get closer to retirement, you have to be ready to figure out how to make your portfolio generate the cash you'll need to pay basic expenses. Many investors turn to dividend stocks for income, especially in the current market environment in which traditional fixed-income investments are paying extremely low yields that make it difficult to produce as much cash as needed.
One ETF that suits investors of all ages is the Vanguard Dividend Appreciation ETF (VIG 0.54%). It gives some weight to current dividend yield in order to ensure an adequate level of income for investors right now, but its key focus is on stocks that have a history of increasing their dividend payouts over time. By giving investors dividend growth stocks, the ETF addresses the need for rising amounts of income to cover ongoing inflation in retirement costs. Overall performance has lagged the market somewhat, but reduced volatility makes many investors more comfortable, and an expense ratio of just 0.08% makes the Vanguard ETF an inexpensive way to invest.
3. Looking globally for great investments
Most retirement investors successfully find ways to get exposure to U.S. stocks. Where they tend to miss out, though, is in adding international exposure to their portfolios. That's where international stock ETFs can be helpful, as they'll focus on foreign companies, many of which have the same, or even more favorable prospects for growth, than their U.S. counterparts.
Many international ETFs give exposure to world markets, but again, cost matters. The Schwab International Multi-Cap Core ETF (SCHF 1.15%) has an expense ratio of just 0.06%, but it owns a rich portfolio of stocks from key markets like Japan, the U.K., France, Germany, Canada, and Australia. Average annual returns of just over 8% over the past five years have lagged what U.S. stock markets have produced, but the prospects for economies in key overseas areas have looked better recently, offering a potential chance for them to catch up. With so many opportunities in foreign markets, U.S. companies, by themselves, can't offer every chance to cash in on worldwide growth potential.
Get moving toward a prosperous retirement
These three ideas aren't the only good ETFs in the market, but they'll give you a sense of how to come up with a strategy that works for you. The earlier you start building your retirement wealth, the easier it will be to reach your financial goals.
Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
FAQs
Experts agree that for most personal investors, a portfolio comprising 5 to 10 ETFs is perfect in terms of diversification. But the number of ETFs is not what you should be looking at.
What are the three best ETFs? ›
3 Top ETFs for a Diversified Stock Portfolio
- SPDR S&P 500 ETF Trust. The SPDR S&P 500 ETF Trust (SPY -0.29%) mirrors the S&P 500 Index, encompassing 500 of the largest U.S. corporations. ...
- Invesco QQQ Trust. ...
- iShares Russell 2000 ETF.
Experts agree that for most personal investors, a portfolio comprising 5 to 10 ETFs is perfect in terms of diversification. But the number of ETFs is not what you should be looking at.
Why no ETFs in 401k? ›
In any case, retirement plans are not really designed for intraday trading. They are supposed to be long-term investments. Many ETFs offer tax efficiency due to their structure, but this becomes irrelevant in a tax-deferred retirement plan such as a 401(k).
Are ETFs good for retirement income? ›
By spreading risk across a large number of holdings, ETFs can help protect your retirement savings from significant losses. Additionally, ETFs provide the flexibility to adjust your retirement portfolio as market conditions change. This is particularly important during periods of market volatility.
What is the 3 ETF strategy? ›
A three-fund portfolio is a portfolio which uses only basic asset classes — usually a domestic stock "total market" index fund, an international stock "total market" index fund and a bond "total market" index fund.
Is 3 ETFs enough? ›
Generally speaking, fewer than 10 ETFs are likely enough to diversify your portfolio, but this will vary depending on your financial goals, ranging from retirement savings to income generation.
What is the 4% rule for ETF? ›
This is commonly referred to as The 4% Rule. The Trinity Study found that you can 'safely' sell off 4% of your total ETF investments once each year, and they 'should' last the next 30 years before you run out.
What are the 4 Vanguard ETFs that could help you retire a millionaire? ›
Getting down to business. You can build a powerful, global portfolio with these four Vanguard ETFs: Vanguard Total Stock Market ETF (NYSEMKT: VTI), Vanguard Total International Stock ETF (NASDAQ: VXUS), Vanguard Total Bond Market ETF (NASDAQ: BND), and Vanguard Total International Bond ETF (NASDAQ: BNDX).
Can you retire a millionaire with ETFs alone? ›
Investing in the stock market is one of the most effective ways to generate long-term wealth, and you don't need to be an experienced investor to make a lot of money. In fact, it's possible to retire a millionaire with next to no effort through exchange-traded funds (ETFs).
One of the biggest reasons Ramsey cautions investors about ETFs is that they are so easy to move in and out of. Unlike traditional mutual funds, which can only be bought or sold once per day, you can buy or sell an ETF on the open market just like an individual stock at any time the market is open.
Why should we avoid ETFs? ›
Market risk
The single biggest risk in ETFs is market risk. Like a mutual fund or a closed-end fund, ETFs are only an investment vehicle—a wrapper for their underlying investment. So if you buy an S&P 500 ETF and the S&P 500 goes down 50%, nothing about how cheap, tax efficient, or transparent an ETF is will help you.
What is the downside of ETFs? ›
For instance, some ETFs may come with fees, others might stray from the value of the underlying asset, ETFs are not always optimized for taxes, and of course — like any investment — ETFs also come with risk.
What is a balanced portfolio for a 65 year old? ›
In your later years, a conservative allocation of 30% cash, 20% bonds and 50% stocks might be appropriate. Diversified portfolios typically include a core of at least 50% stocks in part because equities alone offer the potential to generate long-term returns exceeding inflation.
Do pensions invest in ETFs? ›
Pension plans, unlike employer-sponsored 401k plans, can easily hold ETFs and individual stocks. While some ETFs can be held in 401k plans, the structure of the retirement plan largely favors mutual funds.
How much of your money should be in ETFs? ›
You expose your portfolio to much higher risk with sector ETFs, so you should use them sparingly, but investing 5% to 10% of your total portfolio assets may be appropriate. If you want to be highly conservative, don't use these at all. Consider the two funds below.
What is the highest performing ETF? ›
100 Highest 5 Year ETF Returns
| Symbol | Name | 5-Year Return |
|---|
| PSI | Invesco Semiconductors ETF | 23.83% |
| ITB | iShares U.S. Home Construction ETF | 23.78% |
| FBGX | UBS AG FI Enhanced Large Cap Growth ETN | 23.63% |
| XHB | SPDR S&P Homebuilders ETF | 21.97% |
93 more rowsMost Popular ETFs: Top 100 ETFs By Trading Volume
| Symbol | Name | Avg Daily Share Volume (3mo) |
|---|
| SPY | SPDR S&P 500 ETF Trust | 67,053,180 |
| SOXL | Direxion Daily Semiconductor Bull 3x Shares | 66,634,172 |
| XLF | Financial Select Sector SPDR Fund | 43,856,418 |
| QQQ | Invesco QQQ Trust Series I | 42,968,961 |
96 more rowsTop 100 Highest Dividend Yield ETFs
| Symbol | Name | Dividend Yield |
|---|
| AAPB | GraniteShares 2x Long AAPL Daily ETF | 24.26% |
| TSDD | GraniteShares 2x Short TSLA Daily ETF | 22.56% |
| RYSE | Vest 10 Year Interest Rate Hedge ETF | 22.10% |
| FLJH | Franklin FTSE Japan Hedged ETF Franklin FTSE Japan Hedged Fund | 21.84% |
93 more rowsSPDR S&P 500 ETF Trust (SPY 0.24%) Vanguard S&P 500 ETF (VOO 0.27%) iShares Core S&P 500 ETF (IVV 0.24%) Vanguard Total Stock Market ETF (VTI 0.21%)
