One of the main benefits of diversification is that you don’t need to guess which stocks will rise or fall in a given period. This is also one of the benefits of investing in exchange-traded funds (ETFs), which provide exposure to tens or thousands of companies with the ease of buying and selling a single stock. Put them together and their appeal is clear to investors who don’t have the time or desire to research individual stocks.
There are many ways to let the market as a whole do the work for you as you approach or begin retirement. For investors looking for a comprehensive retirement portfolio, start with these four ETFs.
1. Vanguard S&P 500 ETF
THE Vanguard S&P 500 ETF (NYSEMKT: VOL) reflects the S&P 500 Index, which tracks the 500 largest stocks traded on U.S. markets. The S&P 500 is widely considered the benchmark to beat if you’re considering investing in individual stocks. There’s no shame in putting your money to work with companies like Apple, MicrosoftAnd Alphabet.
The popular SPDR S&P 500 ETF Trust offers you the same thing diversification, but there’s a catch: Its expense ratio is higher than that of the Vanguard ETF. This is something you need to be aware of when owning AND F. These fees are generally lower than what you would pay for a mutual fund, but they can add up over time if you’re not careful.
For perspective, if you invested $500 per month in two ETFs generating an average annual return of 10%, here is how the investments would stack up after 25 years based on their expense ratios:
ETFs | Expense ratio | Amount paid in fees | Value after 25 years |
|---|---|---|---|
Vanguard S&P 500 ETF (VOO). | 0.03% | $2,600 | $587,400 |
SPDR S&P 500 ETF Trust (SPY) | 0.0945% | $7,900 | $582,100 |
Data source: Author’s calculations. Values ​​rounded to the nearest hundred.
The Vanguard S&P 500 ETF is an ideal mix that you can’t go wrong with for your retirement portfolio.
2. iShares Core MSCI Total International Stock ETF
Part of having a well-balanced portfolio is investing in companies from different regions. Some of the world’s largest companies are not listed on the New York Stock Exchange or Nasdaq, which can make them inaccessible. But an ETF is an easy way to access it.
THE iShares Core MSCI Total International Stock ETF (NASDAQ:IXUS) contains more than 4,700 companies from developed and emerging markets. Investing in international companies may require additional consideration, as you need to consider factors such as local politics and economics, currency conversions and regulations. Instead of spending time analyzing all of this, investors can opt for the iShares Core MSCI Total International Stock ETF and gain exposure to the broader international markets.
3. Vanguard Russell 2000 ETF
THE Russell 2000 is the benchmark index for small-cap stocks, similar to the S&P 500 for large-cap stocks.
Small-cap stocks — that is, stocks with market capitalizations between $300 million and $2 billion — can present a good risk-reward tradeoff for investors in two ways. First, they are too small for many institutional investors to buy, which means they are more likely to go unnoticed. Second, a small business with huge opportunities can provide many opportunities for growth. Certainly, some companies are small because they serve smaller markets, and not all will become the next Nvidia – but Nvidia was a small-cap stock almost 20 years ago before joining the $1 trillion market cap club.
Since the Russell 2000 ETFs reflect the same index, there isn’t much difference between them, but the Avant-garde Russell 2000 (NASDAQ:VTWO) is a good option due to its low cost (0.10% expense ratio).
4. Vanguard Mid-Cap ETF
THE Vanguard Mid-Cap ETF (NYSEMKT:VO) can be the sweet spot between small and large cap stocks. With a market capitalization between $2 billion and $10 billion, mid-sized companies are still relatively small compared to large companies, but they are far from family-owned businesses.
Mid-market companies are small enough to provide investors with good growth opportunities, but large enough to have the resources to weather the many economic storms that may come their way. This makes them more stable than small businesses.
The Vanguard Mid-Cap ETF contains just over 330 companies, so it’s not as broad as the other ETFs on this list, but it still contains companies from all major industries.
ETFs Can Help You Diversify Your Retirement Portfolio
When saving for retirement, the risk of picking individual stocks can seem less like the inevitable cost of long-term returns and more like an unwanted burden. Exposing yourself to as much of the stock market as possible can help you achieve significant gains through the diversification of a well-balanced portfolio. Even ETF investors need to be prepared for the volatility inherent in long-term investing, but a well-balanced portfolio should help.
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Steve Walters holds positions in Vanguard Index Funds-Vanguard Mid-Cap ETF and Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends the Vanguard Index Funds-Vanguard Mid-Cap ETF and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
Do you want a well-balanced retirement portfolio? Invest in these 4 ETFs in 2024 was originally published by The Motley Fool
