Passive investing has become an increasingly popular strategy for investors, as a combination of years of smooth, drama-free gains and persistent momentum winners have made more expensive, active strategies unpopular.
Capital is flowing out of hedge funds and active mutual funds. Everyday investors are increasingly heeding the call to move to low-cost, index-focused mutual funds and exchange-traded funds — the latter of which enjoy certain tax advantages and easy tradability. As defined benefit pensions go the way of the dinosaur, self-directed accounts are becoming more prevalent, further feeding the cycle.
With that in mind, here are six retirement ETFs to buy to as a foundation to any well-diversified 401k or IRA plan:
Retirement ETFs to Buy: Vanguard Total Stock Market ETF (VTI)
Expense Ratio: 0.04%, or $4 annually per $10,000 invested
Vanguard founder John Bogle is the granddaddy of passive investing, setting up a passive index mutual fund in 1976 and relentlessly focusing on lowering the cost of investment funds. The Vanguard Total Stock Market ETF (NYSEARCA:VTI) fund gives easy, one-stop exposure to the U.S. equity market (from large-caps to small-caps), along with an ultra-low expense ratio of just 0.04%.
It also provides exposure to both growth and value stocks and invests in a variety of sectors. If you are looking for a single ETF to provide the “beta equity” component of your portfolio, the VTI fits the bill. Top holdings include Apple Inc. (NASDAQ:AAPL) and Microsoft Corporation (NASDAQ:MSFT).
Retirement ETFs to Buy: Vanguard High Dividend Yield ETF (VYM)
Expense Ratio: 0.08%
If you’re an income-focused investor, the Vanguard High Dividend Yield ETF (NYSEARCA:VYM) carries a 3% dividend yield and just a 0.08% expense ratio. The fund focuses on large-cap stocks with above-average dividends found within the FTSE High Yield Index. The selection focuses on technology, financial and healthcare stocks.
With a focus on value names, the fund gives quick and cheap exposure to a basket of roughly 440 holdings with modest risk. The fund’s recent standard deviation of price is less than 10%. Top holdings include Exxon Mobil Corporation (NYSE:XOM) and Johnson & Johnson (NYSE:JNJ).
Retirement ETFs to Buy: Utilities Select Sector SPDR (XLU)
Expense Ratio: 0.14%
If you are an income-focused investor, but want to reduce risk a little further by focusing on defensive, utility stocks, than consider the Utilities SPDR (ETF) (NYSEARCA:XLU) . The fund carries a yield of around 3% on an expense ratio of 0.14%, giving exposure to a sector known for relatively low volatility and good income.
Retirement ETFs to Buy: iShares 20+ Year Treasury Bond (TLT)
Expense Ratio: 0.15%
For the conservative, “risk-free” return component of your portfolio the iShares Barclays 20+ Yr Treas.Bond (ETF) (NASDAQ:TLT) fits the bill. Giving exposure to long-term Treasury bonds, basic portfolio theory states that mixing this with an equity component (with the allocation mix dependent upon an investor’s specific risk tolerance and return goals) is the way to maximize capital growth and minimize losses.
While the risk of default is very low, investors should be aware that the TLT (or any long-term bond fund, for that matter) derives its yield from duration risk. That is, the risk that interest rates suddenly turn higher, reducing the value of the bonds underlying the fund.
Retirement ETFs to Buy: PowerShares DB Commodity Index Tracking Fund (DBC)
Expense Ratio: 0.89%
For an allocation to commodities — as an inflation hedge and to get some exposure to an alternative asset class — consider the PowerShares DB Com Indx Trckng Fund(ETF) (NYSEARCA:DBC) from Invesco, which carries an expense ratio of 0.89% but gives easy, one-shot sensitivity to a basket of hard assets like crude oil, gasoline, gold, wheat and soybeans, among others.
If you like the idea of putting some of your savings into something tangible that you can hold in your hand and put in your car or your mouth or on your mantle, the DBC is it. Returns are muted somewhat because of complications arising from the need to get commodities exposure via financial futures, which results in a negative roll yield. Some newer funds try to get around this problem, but are smaller and carry higher expense ratios.
Retirement ETFs to Buy: VanEck Vectors Gold Miners ETF (GDX)
Expense Ratio: 0.5%
And finally, for those looking at getting precious metals exposure consider the VanEck Vectors Gold Miners ETF (NYSEARCA:GDX) and its holding of a basket of gold mining stocks. With interest in precious metals at a low point — with all the anti-currency types focused on bitcoin and other cryptos — gold stocks are not only a bet on higher inflation, higher gold prices and a weaker dollar but they also carry asset values related to mines, machinery and real estate.
The fund carries an expense ratio of 0.5%, is primarily focused on Canadian companies and it includes names like Newmont Mining Corp (NYSE:NEM) and Barrick Gold Corp (USA) (NYSE:ABX) among its top holdings.