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All Contents © 2017The Kiplinger Washington Editors
By Aaron Levitt
| February 2017
Exchange-traded funds have surged in popularity over the years. And it’s easy to see why. The passively managed baskets of stocks, bonds and other assets allow for intraday tradability at a dirt cheap cost. Perhaps more importantly, they allow investors to customize their portfolios by honing in on certain asset classes or strategies. It’s easy to add a whole segment of the market with just one ticker and a click of the mouse.
For those investors in or near retirement, this fact could be a godsend.
Some asset classes were just made for retirement investors. And most of these asset classes, retirement investors are significantly underweight in or are paying too much for fees/expenses. By using ETFs, they can get exposure at a low cost. Adding them to a portfolio is easy.
So which are the best ETFs for retirement investors? Here are seven that should find their way into almost every retirement investor’s portfolio.
Prices and data are from the original InvestorPlace story published on February 23, 2017. Click on ticker-symbol links in each slide for current prices and more.
This slide show is from InvestorPlace, not the Kiplinger editorial staff.
Expense ratio: 0.08%, or $8 per $10,000 invested
With interest rates still in the proverbial basement, dividends are a great way for retirement investors to get the income they need. And one of the best ETFs to get that dose of dividends is the Vanguard High Dividend Yield ETF.
VYM tracks the FTSE High Dividend Yield Index, which is a portfolio of large-cap stocks that pay above-average dividends relative to the broad market. And while the name “high yield” conjures up images of risky stocks with eye-popping yields that are waiting to be cut, this simply isn’t the case with this ETF.
Its portfolio of 419 different stocks is chocked full of steady-eddy blue chips that churn out secure dividends and cash flows. Top holdings for the ETF include Johnson & Johnson (JNJ) and The Coca-Cola Co. (KO).
That focus on quality dividends has helped VYM perform pretty well over the years.
Since the fund’s inception to the end of this past January, VYM has managed to have a total return of over 104%. That’s enough to double a $100,000 investment. And income seekers should be happy. More than $54,000 of that return was dividends.
Expense ratio: 0.25%
As the growth engines of the future, it’s important to have some exposure to emerging markets. The problem for retirement investors is that emerging markets tend to feature large swings. That volatility keeps them out of most retirees portfolios. The best ETFs for tackling them remove much of that volatility.
And the iShares Edge MSCI Minimum Volatility Emerging Markets ETF is the top choice.
EEMV combs through the much larger and popular MSCI Emerging Markets Index by using screens designed to find those emerging market stocks that exhibit lower volatility than the parent index. This provides investors with the ability to capture some upside while limiting the downside inherent in emerging markets. And the ETFs top holdings read like a who’s who of the developing world’s stalwarts.
More importantly, EEMV has done a good job of limiting the downside vs. its parent index since its own underlying indexes launch in 2009. Drawdowns have been less, while overall gains have been stronger.
For those in retirement, EEMV could be one of the best ETFs to get exposure to emerging markets and their growth. Expenses for the ETF run a cheap 0.25%.
Expense ratio: 0.50%
There is a fine balance between a high yield and security. Preferred stocks can be that balance.
Preferred stocks are kind of like a mix between bonds and equities. On the bond side, these securities feature high yields, maturity date and a par value that is paid when called by the issuing company.
This par value provides a price floor for the security. You’ll at least get that back when the preferred stock matures. That stability is exactly what retirement investors should be looking for.
One of the best ETFs tracking preferred stocks is the oldest: the PowerShares Preferred Portfolio.
The $4.47 billion ETF owns 253 different preferred stocks with the bulk of those being issued by financial firms. The key is PGX’s underlying index: the BofA Merrill Lynch Core Plus Fixed Rate Preferred Securities Index. This index includes some slightly lower-rated investment grade preferred stocks. We aren’t talking junk, but a little less than prime. That inclusion has allowed PGX to outperform and out yield many of its rival ETFs. PGXs currently provides a 5.72% yield.
That’s just enough to give it the edge and title of being one of the best ETFs for retirement investors.
Expense ratio: 0.40%
A lot has been written about the power of gold in a portfolio. And in small doses, the precious metal can act as a great diversifier, inflation and catastrophe hedge. Adding some to a retirement portfolio makes sense.
The easiest way is through the SPDR Gold Trust .
At $34 billion in assets under management, GLD is the largest physically backed gold ETF. As a physically backed ETF, each share of GLD represents a portion of real gold locked away in a vault. In this case, each share is worth one-tenth of an ounce of gold. The real beauty for investors is that this ETF makes owning the precious metal beyond simple.
Buy ten shares, of GLD, and you have one ounce of the precious metal in your portfolio.
And as the largest gold ETF, liquidity for the fund is massive. Owning gold is as easy as placing a trade. There’s no need to find a precious metals broker-dealer when you need/want to sell. There are none of the direct storage or insurance fees either.
When it comes to finding the best ETFs to own gold, GLD is the glittering example.
Expense ratio: 0.35%
Real estate investment trusts or REITs have been stellar performers over the resulting decades since their creation. Thanks to certain tax-advantages at the corporate level, these property owners push much of their cash flows back to investors as high dividends. That income is certainly welcome from retirees.
And when it comes to finding that income, bigger is better. For REITs, size does matter.
The iShares Cohen & Steers REIT ETF focuses its attention on those REITs that are considered “premier” property owners. Essentially, these are the companies that dominate their respective property types. The fund is rather concentrated in just 30 holdings, but you’re getting the top owners of apartments, malls, office building, etc. Leaders such as Simon Property Group Inc (SPG) and Equity Residential (EQR) dominate ICF’s holdings.
In reality, you may not need a ton of other REITs.
What that focus on premier provides are some steady gains. ICF has returned 10.37% average annual returns since its inception since 2001. Even better for retirement investors is that those returns have been less volatile than some of its rival REIT ETFs.
In the end, ICF is one of the best ETFs to buy to own the sector.
The world is getting smaller. Where a company is based has almost nothing to do with where/how it makes its profits. You’re just as likely to use shampoo produced by a British company or drive a German car these days. So having a dose of international stocks makes sense.
But what is important is currency.
Movements in currency can affect the gains and losses on foreign stock ownership. Hedging exchange rate fluctuations can be a great strategy to take forex out of the equation and focus purely on stock returns.
The WisdomTree Dynamic Currency Hedged International Equity Fund takes an interesting approach to currency hedging. The keyword in its name is “dynamic.” The ETF uses a combination of momentum, value and interest rate factors to help determine the currency hedge ratio. That means DDWM will shift its hedging based on the market environment. Most currency hedged ETFs feature an “all or nothing” approach. But in reality, the dollar doesn’t always rise.
By using DDWM, retirement investors can own a basket of great international stocks, while eliminating one of the main problems of owning foreign equities. All for just 0.35% in expenses.
Expense ratio: 0.10%
The single biggest expense in retirement is healthcare costs. The latest estimates come in at a whopping $350,000. But as the saying goes, “if you can’t beat them, join them.”
There’s no reason not to profit from the rising spending. Healthcare could be some of the best ETFs to own through retirement.
A prime choice is the Vanguard Health Care ETF.
VHT tracks a broad range of healthcare firms in the United States. With it, you get drug producers, medical device companies, health insurers, hospital owners, health services firms, biotech — you name it. Overall, investors get access to 365 different healthcare stocks.
That broad scope makes it an ideal way to play the continued demand and rising expenses of healthcare.
And VHT has been pretty good at capturing rising demand/costs. It has been a great performer over the long haul and has returned 10.02% annually over the last ten years. And as a Vanguard fund, VHT costs on 0.10% in expenses.
This article is by Aaron Levitt of InvestorPlace. As of this writing, he was long VHT.
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