Many people mistakenly believe that once they retire, the time for investing in the stock market is over. Yet in many ways, investing becomes more important in retirement, because you need to make sure that your retirement nest egg will outlive you. For most people, that requires a combination of income and growth, and that takes some exposure to the stock market. Fortunately, there are exchange-traded funds that can meet the needs of retirees, and the right mix can make your retirement portfolio work harder for you.
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Data source: Fund companies.
Start with income
Bonds and other fixed-income securities have extremely low yields right now, and that has forced many retirees to consider dividend stocks as a larger part of their income-producing portfolios. The stock market's average dividend yield isn't quite as high as the 10-year Treasury bond yield currently, but dividend stocks offer one thing bonds can't: the prospect for future growth.
You can invest in dividend stocks in a couple of different ways. ETFs like the Schwab U.S. Dividend Equity ETF tend to choose stocks that have higher dividend yields. That maximizes current income, as the Schwab ETF's 3% dividend yield shows. The ETF holds about 100 stocks that are chosen because of their propensity to pay high yields with a track record of consistent payments over time, providing diversification among a group of high-quality dividend stocks.
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The Vanguard Dividend Appreciation ETF takes a different approach. Rather than focusing on current yield, the ETF instead looks at stocks that have a past history of dividend growth over time. The stocks it picks can therefore differ greatly from what the Schwab dividend ETF and other similar funds own. The Vanguard ETF's current yield of 2.1% can't match funds that focus on higher yields, but growing dividends over time can make up for the smaller amount of current income.
Looking for a smoother ride
Concerns about volatility are the biggest problem that retirees face in investing in stocks. Minimum volatility ETFs try to find stocks that won't move as abruptly during market downturns as the overall stock market, and the iShares Edge MSCI USA Minimum Volatility ETF has produced solid returns in recent years in pursuit of that goal.
The iShares ETF owns about 180 stocks that it believes will outperform broader indexes in a bear market. In exchange, most minimum volatility ETFs expect to underperform the stock market during bull markets. Yet as you can see from the iShares ETF's total return, that hasn't been the case lately. Some worry about whether that means that minimum volatility ETFs have lost their edge, but looking at the defensive industries in which the fund concentrates its holdings, the iShares ETF looks like it has high-quality stocks that can stand up to tough times.
Going beyond the U.S.
Finally, retirees shouldn't have their entire stock market allocation invested in U.S. stocks. The one-stop Vanguard Total World Stock ETF provides a more balanced portfolio that is weighted in line with the market capitalizations of stock markets across the globe.
The Vanguard ETF truly invests around the world, holding nearly 7,700 stocks in its extensive portfolio. It's important to understand that as a world stock fund rather than a purely international stock fund, the Vanguard ETF holds U.S. stocks in their correct proportion, and as a result, North American stocks make up more than half of the portfolio. But you'll also find a 20% allocation to Europe, roughly 15% to the Asia-Pacific region, and 10% in emerging markets. That balance can provide investors with the returns they need to succeed and complement their bond and fixed-income holdings.
Retirees shouldn't invest everything they have in stocks, but they should definitely invest some of their assets in the market. These four ETFs can help provide the growth and income you need in retirement to work toward financial security.
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