Three essential ETFs to anchor your retirement portfolio

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Building a retirement portfolio that can support you through your retirement years can be difficult because you need the right balance of growth and security. You also don’t want to constantly watch your wallet because you’ll be too busy enjoying life. After all, isn’t that what you’ve worked so hard for all these years?

In order to keep the money from your investments while ensuring the stability of your portfolio, you need to have certain key holdings that can serve as anchor points for your other investments. With that in mind, three Motley Fool contributors recommend the Invesco S&P 500 Equal Weight ETF (NYSEMKT: RSP), the Vanguard Total Bond Market Index (NASDAQ: BND), and the SPDR S&P Dividend ETF (NYSEMKT: SDY) as basic investments for your retirement portfolio.

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A better way to invest in an index fund

Chuck saletta (Invesco S&P 500 Equal Weight ETF): Index investing has long offered ordinary investors the opportunity to outperform funds managed by the best and brightest on Wall Street. With one-stop diversification and results that typically beat the pros, indexing has become a great way to make money over time with very little effort required.

While this trend has continued in recent years, the current state of the market has revealed what could be a potential flaw in traditional indexing. This flaw is this: Most index funds are weighted by market capitalization, so the largest companies in the index have a disproportionate impact on the fund.

For example, the SPDR S&P 500 Index ETF follows the S&P 500, an index containing around 500 different companies. Within this fund, the top 10 holdings represent over 27% of the fund’s value, although they only represent 2% of the number of companies in the fund’s universe.

It’s great if these businesses grow, but the challenge is that the more a business grows, the harder it is to overtake the market. That’s because each percentage point of growth requires a lot more dollars – and beyond a certain point, those extra dollars become harder to generate sustainably. It also raises the stakes if any of these behemoths stumble, as that company-specific pain would also affect the index fund more.

To address this potential flaw, the Invesco S&P 500 Equal Weight ETF spreads its investments roughly evenly among all companies in the S&P 500 Index. As a result, its top 10 holdings represent only around 2.5% of the value of the fund. That’s better diversification and less money tied up in the absolute largest companies in the index.

As befits a good index investment, the Invesco S&P 500 Equal Weight ETF has a reasonably low expense ratio of 0.2% and a low churn rate on its holdings. This helps it pass more of the returns of the companies it owns to its shareholders.

This combination of factors makes the Invesco S&P 500 evenly weighted EFT worthy of being considered a go-to ETF to anchor your retirement portfolio.

The letters ETF above stacks of coins.

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Barbara Eisner Bayer (Vanguard Total Bond Market ETF): If you’ve spent your working years funneling your retirement savings into stocks like I have, you may not be familiar with the nuances of investing in bonds. But they are a necessary component of preserving capital once you stop working and start living on your savings.

But where to start ? There are treasury bonds, municipal bonds, corporate bonds, and savings bonds. What’s a stockhead to do? The answer, of course, is to buy the Vanguard Total Bond Market ETF, which offers exposure to many bonds and can serve as an anchor for the bond portion of your retirement portfolio.

According to Vanguard, when you buy this fund, you get “broad exposure to the taxable investment grade US dollar-denominated bond market, excluding inflation-protected and tax-exempt bonds.” In other words, you will have very safe and relatively risk-free exposure to the bond market as a whole.

The fund has total net assets worth $ 317 billion and has 10,099 bonds with an average term of 6.8 years, so there is very little turnover. And with its variety of bonds – 65% US Government Bonds, 19.2% Level A Bonds, and 15.8% Level B Bonds – you are considering a pretty safe investment. With an extremely low expense ratio of 0.035%, this Vanguard fund won’t cost you an arm and a leg to own.

However, don’t expect stock style returns. Remember: bonds are there for stability and preservation of capital, not for tempting growth. The three-year average return on this ETF is 5.41%, which is a bit higher than you would normally expect. Since its creation in 2007, the fund has offered investors an average annual return of 4.16%, which is not insignificant given the security it provides.

All retirement portfolios need stability, and bonds are where that treasure can be found. The Vanguard Total Bond Market ETF is the perfect place to invest your money to anchor a secure and worry-free retirement.

Jar full of coins with the word dividends in a yellow sticker on the side.

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An aristocrat among ETFs

Eric Volkman (ETF SPDR S&P Dividends): A solid strategy for retirees (or those nearing retirement) is to invest in reliable companies that pay regular dividends. After all, in our post-work years, there is nothing better than receiving a constant stream of income from our investments.

So I would look for an ETF that focuses on such companies. The one that hits me is the SPDR S&P Dividend ETF, which tracks the S&P High Yield Dividend Aristocrats Index. As the name of the index suggests, its constituents are companies that have increased their payouts to shareholders at least once a year for at least 20 years. That’s five years younger than the widely held norm for a quarter-century streak, but that’s how this fund confers the title.

The official ETF website highlights the attractiveness of these stocks: “Due to the index screen for 20 years of consecutive dividend increases, the stocks included in the index exhibit both characteristics of capital growth and dividend income, as opposed to pure return stocks. “

There are real players in the ETF’s portfolio. For example, the top holding, ExxonMobil, has seen its total return (share price change plus dividends) increase by over 43% so far this year.

Another interesting feature of the SPDR S&P Dividend ETF is its diversity. The portfolio covers many economic sectors including technology, pharmaceuticals, financial services and consumer goods.

This ETF likes its high yield stocks. ExxonMobil certainly falls into this category, with a return of almost 6.3%. AT&T also has a high yield dividend, at 7.6%, just like the lesser known Southern Jersey industries (a natural gas public service), with 5.2%.

Since the SPDR S&P Dividend ETF aims to spread risk by holding a large basket of stocks (112 in total), many of its holdings have significantly lower returns. So overall, the performance of the ETF itself does not approach that of its star holdings. Yet at nearly 2.7%, that’s more than double the 1.3% of that king of all stock indexes, the S&P 500.

And let’s not forget: this is a collection of some of the most trusted payers (and raiseers) money can buy.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.


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