Investing in individual companies isn't for everyone; those looking to simplify their portfolios should consider exchange-traded funds (ETFs). Simply put, ETFs are a group of securities like stocks or bonds that trade under a single ticker symbol. Just like you can buy stocks in different types of companies, you can buy a variety of ETFs to build a diversified portfolio.
This is especially useful to retirees, who don't necessarily want to get too risky with their investing strategy or spend all of their time combing through stocks. Here are five great ETFs for retirees and conservative investors.
1. The market standard
The S&P 500, which contains 500 of the biggest and best corporations in America, is the widely accepted benchmark for the stock market. So an ETF like the Vanguard 500 ETF (VOO 0.89%) is a great starting point for any portfolio. It's constructed to mimic the S&P 500 and carries a minimal expense ratio of 0.03%. In other words, owning the stock will cost just $0.30 annually for every $1,000 you invest.
Warren Buffett famously won a bet that a hedge fund couldn't outperform the S&P 500 over a 10-year period, so don't be shy about building your portfolio around it. The stock market has averaged roughly 10% in annual returns over its long history.
2. Adding some upside to your portfolio
Some investors may want a little more spark in their portfolio while still staying as simple as possible. The Invesco QQQ ETF (QQQ 1.21%) comes to mind as a great choice. This ETF is built around the Nasdaq-100, which focuses on large-cap growth stocks, often in the technology sector. The fund's top holdings include Apple, Microsoft, Amazon, Alphabet, and Nvidia, which combine to make up about 40% of the ETF's holdings.
Big tech has been a big winner over the past decade, and the QQQ has outperformed the market in that time. That said, growth stocks tend to be volatile, so investors should prepared for the ups and downs that can accompany bear markets like the one in 2022. This ETF also has a higher expense ratio of 0.20%, though its historical returns arguably justify the higher cost.
3. Pay your living expenses with this ETF
Dividends can be a retiree's best friend; they're cash distributions paid to shareholders when a company shares its profits with investors. They can be reinvested or used to pay your living expenses. The Vanguard High Dividend Yield ETF (VYM 0.87%) is one of the best dividend-paying ETFs. The fund has a generous dividend yield of almost 3% but charges a low expense ratio of just 0.06%.
The fund includes over 400 names, concentrated mainly in tried-and-true industries like energy, consumer staples, financials, and healthcare. It's not the flashiest fund you can buy, but you can count on a reliable dividend that beats any savings account at your local bank.
4. Retiring to become a real estate tycoon
Owning real estate is one of humankind's oldest and most proven wealth-building tools. But buying real properties isn't as easy as playing Monopoly. Fortunately, you can benefit from real estate by owning the Schwab U.S. REIT ETF (SCHH 0.69%). This ETF is made up of various real estate investment trusts (REITs), companies specifically structured for owning real estate.
REITs are great dividend stocks, and this carries through to this ETF, which also pays a dividend yielding close to 3% as of this writing. Some of the fund's top holdings include blue chip REITs like American Tower Corporation, Realty Income, and Crown Castle. The fund is another low-cost option for investors with a 0.07% expense ratio.
5. Don't forget about adding bonds to your portfolio
Debt has long been a staple of the global economy, yet it is often overlooked as an investment. You can invest in debt through bonds, and the Vanguard Total World Bond ETF (BNDW 0.22%) is an excellent fund for beginners. The fund holds bonds of varying term lengths from all over the world. In other words, it's a catch-all of bonds to keep your portfolio diverse.
Bonds pay interest, meaning this ETF pays its shareholders dividends. The fund's current dividend yield is just over 2%. That's not super high, but it is high quality. After all, the best dividend is a paid dividend. The Total World Bond ETF gives you broad exposure to investment-grade debt worldwide, which is less likely to default.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon.com, American Tower, Apple, Crown Castle, Microsoft, Nvidia, Vanguard S&P 500 ETF, and Vanguard Whitehall Funds - Vanguard High Dividend Yield ETF. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.
FAQs
The Motley Fool has positions in and recommends American Tower, Equinix, Prologis, and Vanguard Specialized Funds-Vanguard Real Estate ETF.
How many ETFs should I own in retirement? ›
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 best performing ETFs over the last 5 years? ›
100 Highest 5 Year ETF Returns
| Symbol | Name | 5-Year Return |
|---|
| PSI | Invesco Semiconductors ETF | 21.78% |
| XLK | Technology Select Sector SPDR Fund | 21.28% |
| SOXL | Direxion Daily Semiconductor Bull 3x Shares | 21.06% |
| IYW | iShares U.S. Technology ETF | 20.86% |
93 more rowsAs most ETFs now trade commission-free and can be bought and sold multiple times throughout the day, they are less likely to be used as buy-and-hold vehicles. Because of his cautionary tone, Ramsey sometimes gets painted with the “anti-ETF” brush. But to be clear, Ramsey's all in favor of using ETFs when used properly.
Does Warren Buffett use ETFs? ›
Warren Buffett owns 2 ETFs—this one is better for everyday investors, experts say.
What is the most profitable ETF to invest in? ›
7 Best ETFs to Buy Now
| ETF | Assets Under Management | Expense Ratio |
|---|
| Invesco QQQ Trust (QQQ) | $254 billion | 0.20% |
| Vanguard Information Technology ETF (VGT) | $70 billion | 0.10% |
| VanEck Semiconductor ETF (SMH) | $16.3 billion | 0.35% |
| Invesco S&P MidCap Momentum ETF (XMMO) | $1.6 billion | 0.34% |
3 more rowsApr 3, 2024
It's relatively simple: You add up all of your investments, and withdraw 4% of that total during your first year of retirement. In subsequent years, you adjust the dollar amount you withdraw to account for inflation.
Should retirees invest in ETFs? ›
ETF benefits, including simplicity, low expenses and tax efficiency, make exchange-traded funds a worthwhile investment for retirement. Popular types of ETFs for retirement include dividend ETFs, fixed-income ETFs and real estate ETFs.
Should I put my retirement in an ETF? ›
Many ETFs offer tax efficiency due to their structure, but this becomes irrelevant in a tax-deferred retirement plan such as a 401(k). It might be more tax-efficient to choose non-tax-deferrable investments to use in a 401(k) and keep ETFs in the investing portion of your portfolio.
Which ETF has the best 10-year return? ›
1. VanEck Semiconductor ETF
- 10-year return: 24.37%
- Assets under management: $10.9B.
- Expense ratio: 0.35%
- As of date: November 30, 2023.
In contrast, the riskiest ETF in the Morningstar database, ProShares Ultra VIX Short-term Futures Fund (UVXY), has a three-year standard deviation of 132.9. The fund, of course, doesn't invest in stocks. It invests in volatility itself, as measured by the so-called Fear Index: The short-term CBOE VIX index.
What ETF consistently beat the market? ›
MarketWatch spotlights VanEck Morningstar Wide Moat ETF (MOAT), consistently outperforming the S&P 500 by targeting companies with long-term competitive advantages or "economic moats."
Why does Dave Ramsey not recommend 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.
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).
What does Ramsey say to invest in? ›
Mutual funds are the way to go. They cast a wide net across many companies, helping you avoid the risks that come with the trendy stuff, like crypto. Just remember, match beats Roth beats traditional on figuring out where to invest for retirement first.
Is there a downside to investing in ETFs? ›
Underlying Fluctuations and Risks
ETFs, like mutual funds, are often lauded for the diversification that they offer investors. However, it is important to note that just because an ETF contains more than one underlying position doesn't mean that it is immune to volatility.
Is it smart to just invest in ETFs? ›
If you're looking for an easy solution to investing, ETFs can be an excellent choice. ETFs typically offer a diversified allocation to whatever you're investing in (stocks, bonds or both). You want to beat most investors, even the pros, with little effort.
Is it smart to only invest in ETFs? ›
ETFs can be a great investment for long-term investors and those with shorter-term time horizons. They can be especially valuable to beginning investors. That's because they won't require the time, effort, and experience needed to research individual stocks.
Is it okay to just invest in ETFs? ›
ETFs can be safe investments if used correctly, offering diversification and flexibility. Indexed ETFs, tracking specific indexes like the S&P 500, are generally safe and tend to gain value over time. Leveraged ETFs can be used to amplify returns, but they can be riskier due to increased volatility.
