At the Motley Fool, we believe investing in stocks is the most effective way to predictably generate wealth over the long term, which lets the power of compounding returns do its work. But not everyone has the time or inclination to research individual stocks. So thankfully, one promising alternative is to invest in an exchange-traded fund (ETF), a marketable security that tracks a particular index and trades on a major stock exchange. To that end, we asked three top Motley Fool investors to offer an ETF investors could use to help keep their retirement savings on track, and they chose the Vanguard S&P 500 ETF (NYSEMKT: VOO), the Vanguard REIT ETF (NYSEMKT: VNQ), and the Vanguard Mid-Cap Value ETF (NYSEMKT: VOE).
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If you can't beat 'em...
Steve Symington (Vanguard S&P 500 ETF): It's already exceedingly difficult to beat the S&P 500 Index, which is arguably the most widely followed barometer for the broader-market's performance, and has averaged historical annual returns of roughly 10%. In fact, according to a research report from Standard & Poor's on actively managed funds earlier this year, 92.15% of all large-cap, 95.4% of mid-cap, and 93.21% of small-cap managers have lagged their respective benchmarks over the 15-year period ended December 2016.
So why not buy a low-cost ETF like the Vanguard S&P 500 ETF? Just like it sounds, the Vanguard S&P 500 ETF invests in stocks in the S&P 500, with the goal of closely tracking the index's returns -- an attractive proposition when so many others trail behind. What's more, in keeping with most Vanguard products, the Vanguard S&P 500 ETF boasts an ultra-low expense ratio of 0.04% compared to the higher industry-average ETF expense ratio of 0.28%. Not paying those extra fees will add up as your gains compound over the years, and should result in a hefty extra chunk of cash in your retirement savings.
For investors who would rather not buy individual stocks, the Vanguard S&P 500 ETF is a great option to keep your retirement savings on track.
A great complement to stocks and bonds
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Matt DiLallo (Vanguard REIT ETF): Investing in real estate is a great way to invest for and during retirement. Not only does the sector help diversify some of the risks of investing in stocks and bonds, but investors can collect a steadily rising income stream, with additional upside potential as real estate values appreciate. While there are plenty of ways to invest in real estate, one of the easiest is to buy an exchanged-traded fund focused on the sector, with the top option, in my opinion, being the Vanguard REIT ETF.
One of the things I like about the Vanguard REIT ETF is that it offers broad exposure across several types of commercial properties because it invests in more than 150 REITs that own healthcare, office, residential, industrial, and hotel and resort properties. This diversified exposure enables investors to benefit from the upside of investing in real estate while minimizing the downside that comes from choosing the wrong REIT. Further, investors can reduce their risk while still collecting a healthy income stream, given that the Vanguard REIT ETF currently yields nearly 4.4%.
That said, what makes the Vanguard REIT ETF stand apart from the crowd is its lower expenses. In fact, its current expense ratio of 0.12% is 90% lower than competing funds with similar holdings. Those fees can really add up. For example, a hypothetical $10,000 investment that earns a 9% annual return over 10 years would generate $2,777 in fees if invested in a competing fund. However, that same investment would only produce $283 in fees at Vanguard, which means more money stays in your portfolio, helping you stay on track with your retirement savings plan. That's why I think the Vanguard REIT ETF is the right option for retirement-focused investors.
Mid-sized value for a microscopic fee
Cory Renauer (Vanguard Mid-Cap Value ETF): Investors looking for an inexpensive way to keep their retirement savings on track will want to take a closer look at this option from the low-cost fund leader. This ETF exposes investors to a well-diversified portfolio of mid-sized U.S. stocks that look relatively undervalued when measured on a handful of metrics, and does it all with a shockingly low 0.07% expense ratio.
For such a low fee, you might expect a simple strategy, but Vanguard's Mid-Cap Value ETF is a bit more sophisticated than you might expect. The ETF tracks the U.S. Mid-Cap Value Index created by the Center for Research in Security Prices, which takes a very interesting approach to providing investors with exposure to mid-cap stocks that look undervalued.
In a nutshell, the fund selects stocks smaller than those representing 70% of the U.S. stock market by market capitalization, but still larger than those representing the smallest 15% of the market. With a basket of suitably sized stocks in place, it applies value scores derived from price-to-earnings ratios and other common metrics. Stocks that pass through the size filter with the highest value scores make the cut, but their weight in the portfolio is based on market-cap size, not their value scores.
At the end of June, the diverse portfolio was made up of 202 stocks, with Newell Brands and Western Digital taking up the most space with a weighting of 1.4% each. The majority of stocks in the fund sported market caps of $13 billion or less and were trading at about 18.8 times trailing earnings. With the average stock in the S&P 500 trading at 23.94 times trailing earnings, this mid-cap value ETF certainly lives up to its name.
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Cory Renauer has no position in any stocks mentioned. Matt DiLallo has no position in any stocks mentioned. Steve Symington has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.