Exchange-traded funds and retirement go hand in hand. Unfortunately, most investors in defined contribution plans like 401k’s don’t have access to them yet. But that shouldn’t stop you from using ETFs in other accounts for retirement planning, like IRAs, or after you’ve retired.
Benefits like low costs, intraday tradability and access to esoteric and non-traditional asset classes are some of the hallmarks of ETFs. They can be used to plug holes in overall asset allocation or help you build a core grouping of investments. And let’s not forget about the significant tax advantages inherent in many ETFs over other forms of investment vehicles.
ETFs can truly do it all for retirement planning.
What’s even better is that some ETFs seem to have been made for the golden years of investors. Dividends, inflation protection and more can all be had via these funds. Given that fact, there’s no reason not to use them.
And here’s seven of the best ETFs every retired investors should own.
ETFs for Retirees: SPDR S&P Dividend ETF (SDY)
Expenses: 0.35%, or $35 per every $10,000 invested
Dividend Yield: 2.34%
While investors tend to focus on what a stock is currently yielding, a steadily rising payout actually is the way to power through a retirement. Longer term, dividend growth is key. It’s what keeps inflation from killing your spending power during your golden years.
Luckily, there’s a whole herd of dividend growth ETFs and the SPDR S&P Dividend (ETF) (NYSEARCA:SDY) is one of the best.
SDY tracks the S&P High Yield Dividend Aristocrats. That’s a measure of stocks that have managed to grow their payouts for at least 20 years, year in and year out. This exclusive club includes stalwarts like Realty Income Corp (NYSE:O) and Caterpillar Inc. (NYSE:CAT). It’s basically and who’s who of long-term dividend payers.
Even better is that SDY only follows the 100 highest yielding members of this club. Investors are able to get a high yield (currently 2.34%) that has consistently grown over long stretches of time. And while that yield may not turn heads, the idea is that it will grow over time as its holding skep kicking back more cash to retired investors.
Adding to SDY’s appeal is its cheap 0.35% expense ratio.
ETFs for Retirees: PowerShares Preferred Portfolio (PGX)
Dividend Yield: 5.57%
Growing dividends are great, but you also need current yield as well. ETFs deliver here for retirement investors as well.
The PowerShares Preferred Portfolio (ETF) (NYSEARCA:PGX) bets on preferred stock. These hybrids feature high yields, like bonds, often in the 4% to 7% range. They also feature a par value that after a certain maturity date, they can be called by the issuing company. The real benefit of preferred stock is that it is senior to common stock in that dividends must be paid to preferred holders before common stock.
As a hybrid, preferred stock tends not to move around as much and the ability of capital appreciation is muted. Much of the return comes from the high yield. But for those in retirement, that 30-day SEC yield of 5.57% is a great return.
The vast bulk — currently 84% — of PGX’s holdings are in financials. But that isn’t so much a problem given preferreds status. There’s less risk here.
Expenses for PGX run a cheap 0.50%.
ETFs for Retirees: iShares International Select Dividend ETF (IDV)
Dividend Yield: 5.77%
Retirement investors shouldn’t ignore the wealth of dividends available outside our borders. Just as in the U.S., there’s plenty of multinational giants located in Europe, Asia and other locales across the globe. Stocks like GlaxoSmithKline plc (ADR) (NYSE:GSK) or Siemens AG (ADR) (OTCMKTS:SIEGY) are just as just a big as their American counterparts. By honing in on only the U.S., investors are limiting the opportunity set for success.
ETFs can help on that front for retired investors.
The iShares Dow Jones EPAC Sel Div Ind (ETF) (NYSEARCA:IDV) could be one of the best places to start when it comes to international dividend ETFs. IDV tracks the Dow Jones EPAC Select Dividend Index, which is a measure of high-dividend-paying equities in non-U.S. developed markets.
The ETF screens for those that have consistently paid those dividends over longer periods of time. That currently creates a portfolio 100 different non-U.S. stocks. It also creates a monster 5.77% dividend yield.
All in all, with its expense ratio of 0.50%, IDV is one of the best ETFs for retired investors looking to add a dose of international dividend muscle.
ETFs for Retirees: Vanguard FTSE Emerging Markets ETF (VWO)
Dividend Yield: 2.42%
Even when investors are retired, it still going to take a lot of growth to get them through. Longevity risk is real. And that’s why a dose of emerging market exposure may be in order. But there is plenty of risks involved in beaten on emerging market stocks. That’s why a broad approach is best.
The Vanguard Emerging Markets Stock Index Fd (NYSEARCA:VWO) is the king of the emerging market space. Its underlying index holds a staggering 4,076 different emerging market stocks. This includes large-, mid- and small-cap stocks in emerging markets.
How about that for diversification?
The one potential wrinkle for retirement investors is that FTSE has already decided to include Chinese mainland or A-shares in its indexes. Other indexer MSCI is still debating the switch. That potentially has fund adding a swath of relatively risky Chinese stocks to its portfolio. Overall, China will make-up about 27% of VWO’s holdings.
But if investors keep the position small, the risk is diminished. That means they have a chance to add some serious growth potential to their retirement accounts. The icing on the cake is VWO ultra low expense ratio of 0.15%.
ETFs for Retirees: iShares 0-5 Year TIPS Bond ETF (STIP)
Dividend Yield: 4.66%
Keeping up with spending power is one of the most important things a retirement investor can do. After all, you need to make sure that inflation doesn’t eat your savings for potentially up to thirty years.
Treasury Inflation-Protected Securities — or bonds that provide investors a fixed yield plus an “extra boost” of adjustments designed to offset inflation — have been a great way to ward off the so-called silent killer since their inception. The problem is that TIPS are great in rising rate environment. As a long bond, they’ll get crushed.
Luckily, ETFs can be a retirement investor’s best friend when it comes to TIPS.
The iShares 0-5 Year TIPS Bond ETF (NYSEARCA:STIP) holds TIPS that have maturities of less than five years. That makes them less sensitive to interest rates. They won’t fall by as much when the Federal Reserve finally raises rates. This makes STIP a great place for retired investors that need inflation protection but can’t afford the potential loss in principal.
By using ETFs, investors can have their cake and eat it too.
*Net expense ratio valid through Feb. 28, 2019
ETFs for Retirees: Guggenheim BulletShares ETFs
Dividend Yield: N/A
For retired investors, the hardest thing is determining just when you need to take income from your portfolio. Pinpointing those cash flows are critical. So anything that can help on that front is certainly welcome. And the suite of Guggenheim BulletShares ETFs is very welcome indeed.
BulletShares are considered defined maturity ETFs. That is, on a certain date, they’ll cease to be. Assets in the ETF will be sold off and investors will get a check for the proceeds. That’s wonderful news for income planning.
Want to buy a new car in 10 years? Park your cash in the Guggenheim BulletShares 2025 Corporate Bond ETF (NYSEARCA:BSCP). Elective surgery coming up in three years? The Guggenheim BulletShares 2019 High Yield Corporate Bond ETF (NYSEARCA:BSJJ) is for you. Their real beauty lies in the fact that you can use them like a bond or CD ladder and get higher current yields. BulletShares come in two flavors — investment grade corporate bonds and high yield/junk bonds.
But as income planners, these defined maturity funds are a great tool ETFs bring to the table.
ETFs for Retirees: Schwab U.S. REIT ETF (SCHH)
Dividend Yield: 2.87%
Real estate investment trusts, or REITs, are a powerful ally for retirement investors.
REITs own various real estate assets — such as apartment buildings, shopping centers, offices and even hospitals. In order to receive lucrative tax benefits at the corporate level, REITs must kick back much of their cash flows as dividends. The combination of their higher yields, inflation resistant assets and capital appreciation have allowed them to be great performers over the long haul.
The Schwab Strategic Trust (NYSEARCA:SCHH) is the lowest cost REIT ETF out there. Currently, it only charges 0.07% to hold it. For that cheap price, investors get a basket of the 100 largest REITs. This includes stalwarts like Simon Property Group Inc (NYSE:SPG) and multi-family housing owner AvalonBay Communities Inc (NYSE:AVB).
REITs prowess can be summed up in SCHH’s returns. The ETF managed to post 13%-plus annual returns since its inception in 2011.
All in all, retirement investors should add a dose of real estate in their portfolio. SCHH makes adding that stake cheap and easy.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.