Are ETFs a Good Fit for Your Retirement Portfolio?

ETFs can be a great choice for active investors and can offer savings that blow mutual funds out of the water.

Jan 17, 2014 at 6:39PM

ETFs (exchange-traded funds) can be a great addition to your retirement portfolio at any stage in the game. Whether you are a new investor or are nearing retirement, ETFs can be the perfect solution for diversifying your portfolio and gaining market exposure while keeping expenses low.

While ETFs have many upsides, there are some things you should consider before jumping in.

How active of an investor are you?
One of the biggest advantages ETFs offer in contrast to mutual funds is that they can be traded like a stock, but they generally require more work than investing in mutual funds.

Bid-ask spread
Liquidity can make a big difference when it comes to trading ETFs. The more heavily traded an ETF is, the smaller the bid-ask spread will be. In a heavily traded ETF, the bid-ask spread naturally narrows because there are plenty of buyers and sellers.

For example, iShares MSCI Emerging Markets (NYSEMKT:EEM) is a heavily traded ETF. Averaging around 63.5 million shares in daily trading volume for the last three months, this ETF is unlikely to have a bid-ask spread of more than a few cents at any given time. A heavily traded fund like iShares MSCI Emerging Markets is optimal for investors who do not want to spend hours watching the bid-ask spread waiting for just the right moment to pull the trigger.

Similarly, ETFs trade at a premium or a discount. Unlike mutual funds, which trade at a single price for the day, ETFs trade at a premium or discount in relation to their underlying net asset value. For investors who buy and hold, this is less important. If you are an investor who has entered the ETF market because you like to trade a lot, however, it is important to be aware that bid-ask spreads and premiums and discounts can affect your returns positively or negatively over the long run.

An extreme example of premium/discount swing is iShares MSCI Philippines (NYSEMKT:EPHE), which experienced a more-than 10% swing in premium and discount over nine days last June. Investors looking to make a large buy at that particular moment could have unknowingly become winners or losers without even trying. This low-volume ETF also experiences big gaps in bid-ask spread because it does not trade nearly the volume of other ETFs. This fund only trades an average of about 200,000 shares on a daily basis, and bid-ask spreads can be more than $1.50 per share. Compare that with iShares MSCI Emerging Markets, which trades 185 times that many shares in a single day on average and usually has a bid-ask spread of about a penny.

Automatic investing
Many investors like to put their savings on autopilot. If you prefer to "set it and forget it," investing in mutual funds may be a better choice. Most brokerages offer periodic investing options for mutual funds on a monthly, quarterly, or annual basis. Periodic investing is only available for mutual funds, not ETFs. Investors who like to dollar-cost average by spreading their buys throughout the year should consider sticking with mutual funds. Most brokerages waive fees for periodic investing and allow investors to make smaller buys after their initial buy into the fund. Keep in mind that if you choose to purchase ETFs on a monthly basis instead, there are usually fees that will accompany each trade.

Will ETFs help you reduce fees?
Nothing erodes the value of a retirement account faster than fees. They may seem small, but over time they add up. Over the course of 30 or 40 years of saving, the difference of 1% in fees can be the difference between retiring comfortably and having to work a lot longer.

ETFs offer tremendous value when it comes to fees. For example, Vanguard FTSE Emerging Markets ETF (NYSEMKT:VWO) offers investors exposure to mostly large-cap emerging-market stocks at a very low 0.18% expense ratio. Given the net average expense ratio of 0.58% for the category, investors who buy and hold stand to save a substantial amount of money over the long term.

ETFs are often less expensive than their mutual-fund counterparts. While the expense ratios of ETFs may be lower than a mutual fund with similar holdings, it is important to factor in other expenses, such as commission charges. Some brokerages offer commission-free trades on certain ETFs. This can be a great way to save money in fees when trading ETFs; however, it is important to carefully examine the ETF to make sure it will help you meet your goals. Cheap doesn't always mean good.

The No. 1 Way to Lose Your Wealth Without Even Knowing It
You've fought hard to build wealth for you and your family. Yet one all-too-common pitfall could completely derail your dreams before you even know it. That's why a company The Economist hails as "an ethical oasis" has isolated five simple questions you must answer to ensure that your financial future is really secure.

Can you answer YES to all five of these eye-opening questions?
Click here to find out -- before it's too late!

Fool contributor Melinda Melendez has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers