Investing doesn't end when your career does. Retirement can last 30 years or longer, and you have to be smart with your investments to make them work hard even when you stop working. Fortunately, for those retirees who don't want to spend the rest of their lives poring over their portfolios, exchange-traded funds can offer a simple but reliable answer. Below, we'll look at five ETFs that can help you stay invested after retirement.
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Data source: Fund companies.
Getting the dividend income you need
Dividend stocks can be extremely valuable for retirees seeking to generate more income from their portfolios. Dividend ETFs can have different objectives, and it's important to be comfortable with the approach that your particular dividend ETF takes toward choosing the best dividend stocks available.
Two Vanguard ETFs show the differences in approaches. The Vanguard High Dividend Yield ETF takes a more traditional approach toward dividend investing, focusing on the highest yielding stocks in the market. The fund holds more than 400 stocks in its portfolio, and it currently generates a yield of almost 3.25%. That's substantially above the average for major stock market benchmarks, and with a rock-bottom expense ratio, the ETF doesn't lose much of its income or returns to fees.
By contrast, the Vanguard Dividend Appreciation ETF focuses on stocks that have consistently increased their dividend payments over the long run. That results in the ETF not always having the highest-yielding dividend stocks available, but it instead serves to assure investors that income payouts will steadily rise over time. Its current yield of 2.25% lags its sibling dividend ETF at Vanguard by a full percentage point, but the potential growth available makes the trade-off worth it for many retiree investors.
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Cutting back on market volatility
One thing that scares retirees out of stocks entirely is the threat of a stock market crash. Minimum volatility ETFs were designed to choose stocks that have more modest moves than the average stock in the market, and both the iShares Edge MSCI USA Minimum Volatility ETF and the PowerShares S&P 500 Low Volatility ETF have performed well in achieving that goal in recent years.
Investors who have focused on defensive industries and individual stocks that are less vulnerable to swings in the economy have tended to outperform the broader market with smaller declines during bad periods. Yet although these defensive stocks from industries like consumer staples and regulated utilities have typically lagged during bull markets, both the iShares and PowerShares ETFs have produced strong performance during the current bull period. That has raised some questions about whether these stocks might not act the way they usually do during the next bear market, but the two ETFs are still worth a closer look for retirees seeking to manage stock market risk.
Going beyond stocks
Finally, retirees shouldn't be entirely invested in the stock market. Real estate can be a good diversifying asset, and the Vanguard REIT ETF is a solid low-cost way to invest in real estate investment trusts.
REITs are useful investments because they generate reliable income. The tax laws governing REITs require them to pay out 90% or more of their income to their shareholders in the form of dividends, and that leads to the above-average dividend yields that you'll see from these real estate investments. Currently, the fund's distribution yield is almost 4%, although Vanguard is quick to note that some of these distributions include return of capital rather than true income. Nevertheless, with an adjusted effective yield of 2.7% and the potential for further price gains if real estate keeps doing well, the Vanguard REIT ETF can bring some diversification to a stock-rich portfolio.
Retirees shouldn't stop investing just because they stop working. These five ETFs can help you stay invested and enjoy a more financially prosperous retirement.
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