Even just one of these funds can benefit you in the long run.
When investing for retirement, you may not have the same energy and interest in studying stocks and other investments, nor the patience to carefully decide what to buy, when to buy, and when to sell. Over time, your ability to manage investments may also decline. That’s why you should consider investing in exchange-traded funds (ETFs) for at least part of your retirement portfolio—if not more.
In fact, a single ETF, like the first one below, could be all you need for retirement. But there are several worth considering.
1. S&P 500 Index Fund
The Vanguard S&P 500 ETF (VOO -0.38%) is a great starting point with an ultra-low annual fee (expense ratio) of just 0.03%—and it might be all you need. However, it’s important to understand that ETFs are funds that trade like stocks. You can easily buy a single share through a brokerage and sell it at any time. But holding on for decades is a smart approach if you’re aiming for long-term financial stability.
When you buy shares of this ETF, your money is spread across nearly all of the 500 stocks in the S&P 500 index, which focuses on America’s largest companies. While the index holds only 500 of the thousands of U.S. stocks, it accounts for about 80% of the total stock market value. Many consider the S&P 500 a benchmark for the U.S. stock market—more specifically, for large-cap U.S. stocks.
Before investing, research this fund and others to understand what they hold and the fees they charge. (Index funds, which track various market indexes, typically have very low fees.)
One important thing to know about a standard S&P 500 index fund is that although it holds hundreds of companies, a few large ones dominate the index. For example, the top 10 holdings—including Apple, Microsoft, and Amazon—make up about 29% of the index’s total value. This happens because the index is market-cap weighted, meaning the largest companies have a greater influence on its performance. Meanwhile, the bottom 100 or 200 holdings make up only a small portion of the index’s total value.
To counteract this, you could invest in an equal-weighted S&P 500 ETF, such as the Invesco S&P 500 Equal Weight ETF (RSP).
2. Total U.S. Stock Market Fund
The S&P 500 index fund is great, but it excludes many smaller U.S. companies such as Kohl’s, Mattel, The New York Times, Harley-Davidson, and homebuilder Toll Brothers.
If you want exposure to nearly every publicly traded company in the U.S., consider investing in a total U.S. stock market ETF, such as the Vanguard Total Stock Market ETF (VTI -0.34%).
This ETF has an ultra-low annual fee of 0.03%, which is expected since Vanguard is known for its low-cost funds.
3. Total Global Stock Market Fund
You can broaden your investments further with a global stock market ETF, such as the Vanguard Total World Stock ETF (VT -0.43%), which spreads your money across the entire world’s stock market.
While its top holdings resemble those in the first two ETFs, it also includes Taiwan Semiconductor, China’s Tencent Holdings, and Toyota Motor.
As another Vanguard fund, it has a very low expense ratio of 0.07%.
4. Dividend-Focused Fund
As a retiree, you’ll likely appreciate dividends from index funds. While the ETFs mentioned above pay dividends, an ETF focused specifically on dividend stocks—like the Vanguard Dividend Appreciation ETF (VIG -0.33%)—can provide higher yields.
For instance, the Vanguard S&P 500 ETF recently had a dividend yield of 1.34%, whereas the Vanguard Dividend Appreciation ETF had a yield of 1.74%. (Its expense ratio is also a low 0.06%.)
Dividend-paying companies are excellent wealth builders for younger investors and a reliable income source for older investors. The key advantage of dividends is that they continue to be paid regardless of stock market fluctuations, and healthy, growing dividend payers tend to increase their dividends regularly.
This ETF aims to replicate the performance of the S&P Dividend Growers Index, which focuses on companies that have consistently paid dividends for at least 10 consecutive years. Interestingly, it excludes the top 25% of highest-yielding companies, as extremely high yields are often associated with struggling businesses. Additionally, Real Estate Investment Trusts (REITs) are excluded.
Top holdings include Microsoft, UnitedHealth Group, Johnson & Johnson, Visa, Coca-Cola, and Costco.
5. Real Estate Fund
Speaking of real estate, it’s not a bad investment category, and REITs (Real Estate Investment Trusts) allow you to invest in real estate easily.
REITs are required to distribute at least 90% of their income as dividends, making them an attractive option for retirees.
One REIT-focused ETF to consider is the Vanguard Real Estate Index Fund ETF (VNQ -0.14%), which has a low annual fee of 0.12%.
Top holdings include American Tower, Public Storage, Realty Income, and Digital Realty Trust.
Since REIT income fluctuates based on property values, Vanguard notes that it cannot provide a fixed dividend amount. However, on its ETF webpage, Vanguard reports recent effective yields ranging from 1.8% to 2.6%, depending on adjustments for capital gains and returns.
