As anyone of a certain age knows, investing in retirement is different from investing for retirement. For one thing, you can't afford a lot of volatility: If your portfolio takes a big hit after you're retired, you might not be able to wait for it to recover before you have to withdraw money.
Concerns about stock market volatility are why some advisors will tell you to avoid stocks altogether after you retire. That seems a little much: The stock market is still a great engine of growth, one that you probably don't want to abandon entirely. But instead of hairy-scary small-caps, it's time to look at blue chips, large-cap stocks, well-run dividend payers, even real estate investment trusts. They're still equity investments, but they're a lot less likely to keep you up at night -- especially if you diversify your holdings within the asset class.
How do you do that? A high-quality exchange-traded fund (ETF) is a simple, low-cost way to invest in a diversified basket of stocks. Of course, finding the "high-quality" ETFs can be a challenge, so we asked three of our Foolish specialists to do the work for you. They've identified three good choices for a retired investor who doesn't want to be left out of the market's growth potential: WisdomTree U.S. Quality Dividend Growth Fund (DGRW 0.83%), Vanguard REIT ETF (VNQ 0.89%), and Vanguard S&P 500 ETF (VOO 0.87%).
Read on to learn more about each.
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One-stop shopping for great dividend stocks
John Rosevear (WisdomTree U.S. Quality Dividend Growth Fund): The WisdomTree U.S. Quality Dividend Growth Fund is what the industry calls an "enhanced strategy" ETF. It's an index fund, but rather than following an independent index, it follows a custom index created by WisdomTree. That's the "enhancement."
A custom-made index allows the fund manager to limit the fund's investment universe to stocks that meet certain quality criteria. In this fund's case, its index includes 300 dividend-paying companies "with the best combined rank of growth and quality factors: specifically long-term earnings growth expectations, return on equity, and return on assets," WisdomTree says.
What's that mean in practice? It means the fund's top five holdings are all familiar names -- and good ones: Johnson & Johnson, Apple, Microsoft, Altria Group, and PepsiCo.
The rest of the fund's top holdings are similar -- all large-cap dividend-paying companies that are well-known to most seasoned investors. If you're going to own stocks in retirement, these are the kind of stocks to own: steady dividends, high-quality management, not too volatile when the market gets choppy. The fund gives you a quick and simple way to get a diversified basket of good ones.
With a net expense ratio of 0.28%, this ETF isn't crazy-expensive, but it's not the cheapest one you'll find. Generally, we like the lowest-cost ETFs, but in this case it's probably worth paying a little bit extra: This fund's performance has been outstanding over its roughly four-year life. And it gets top marks from fund experts, including a five-star Morningstar rating. If your portfolio could use more high-quality large-cap dividend-stock exposure -- and many folks' could, especially in retirement -- then this fund is worth serious consideration.
Real estate investing without the landlord headaches
Chuck Saletta (Vanguard REIT ETF): Many retirees would like the potential cash flow benefits that come from owning real estate, but are concerned about the efforts and risks associated with being a landlord. That's where real estate investment trusts (REITs) can play a role in a retiree's investment portfolio. Professionally managed businesses that focus on real estate investing, REITs can provide many of the benefits of real estate without the headaches of direct ownership.
The Vanguard REIT ETF provides an excellent investment vehicle for those looking for real estate exposure. The ETF seeks to track the MSCI US REIT index, which focuses on equity REITs. Since it tracks an index, it can keep both turnover and costs low, helping put more of investors' money toward the actual investment, rather than overhead and fees. Turnover is a scant 7% annually, and fees clock in at a minuscule 0.12% per year.
And of course, with its focus on real estate, the Vanguard REIT ETF offers investors a solid yield around 4%, providing the cash flow that retirees are looking for from their real estate investments. Note that the ETF's distribution does change from year to year and even quarter to quarter, as not all distributions are provided purely from operating cash flows. If the underlying REITs offer up capital gains to return to shareholders as capital distributions, the ETF passes those through to its investors. That can make the income stream a bit lumpy.
As a result, if you're going to invest in this ETF in your retirement, don't expect a smooth payout or an ever-increasing distribution stream from it. Still, when it comes to giving retirees the real estate exposure many are looking for from their portfolio, it's a strong candidate for consideration.
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Hard to beat and easy to own
Cory Renauer (Vanguard S&P 500 ETF): Since the inception of the S&P 500 index 60 years ago, actively managed funds of all shapes and sizes have struggled to outperform it. Over the 15-year period ending December 2016, 92.15% of active large-cap managers underperformed the benchmark index, but that doesn't mean you've got a 7.85% chance of picking a long-term winner -- over the same 15-year period, a majority of actively managed funds ceased to exist.
The magnitude of survivorship bias that favors actively managed funds is difficult to gauge, but it's easy to understand why the index, and the ETF that tracks it, is so hard to beat. Tracking a market-cap weighted index, such as the S&P 500, requires relatively little trading activity. Last year, the Vanguard S&P 500 ETF turned over just 4% of its portfolio, while most actively managed funds turn over a majority of their assets every year.
Less trading leads to fewer commissions, and that's a large reason the Vanguard S&P 500 ETF has an ultra-low 0.04% expense ratio. That's right: Keeping $10,000 in this fund for a year will cost you less than a cheeseburger.
Super-low fees aren't the only reason this is an easy ETF to own. If you're looking forward to an active retirement that won't allow much time to check the performance of your ETFs, the S&P 500 is possibly the most commonly quoted index across news outlets of all types.
