For investors who want the diversification benefits of mutual funds without the sometimes exorbitant fees, exchange-traded funds (ETFs) have quickly become the option of choice. For retirees who want to beef up their income and growth potential, three ETFs that warrant consideration are Vanguard High Dividend Yield ETF (NYSEMKT:VYM), Sector SPDR Trust SBI (NYSEMKT:XLK), and Vanguard REIT ETF (NYSEMKT:VNQ).
A sturdy income play
Keith Noonan (Vanguard High Dividend Yield ETF): If you're looking for returned income and broad exposure to American businesses during your retirement years, the Vanguard High-Dividend Yield ETF is one of the best investment options on the table. The fund packs strong defensive potential because dividend-paying stocks tend to fair better during downturn or periods of uncertainty, and generating income in your non-working years also limits the need to dip into savings and reduces the risks presented by market volatility.
Vanguard's High Dividend Yield ETF holds 428 individual securities, with the majority of its assets concentrated in companies that operate in the consumer goods, technology, financial services, industrials, and healthcare sectors. Its largest holdings include Microsoft, Johnson & Johnson, ExxonMobil, JP Morgan Chase, and Wells Fargo, and in general, the fund's investments consist of mature companies with strong market positions and above-average yields. As of this writing, the fund's yield sits at 3.1%, which is comfortably above the S&P 500 index's roughly 1.9% yield, and its broad diversification points to reliable income generation with a lower risk profile than if you were to invest in a handful of high-yield stocks.
Looking at fund costs, Vanguard's High Dividend Yield ETF carries an expense ratio of just 0.08%, which means the fees for every $1,000 invested come out to just $8 annually. The company states that this management cost is 92% lower than the average expense ratio of funds with similar holdings. With a low expense ratio, broad diversification, and an impressive dividend component, the Vanguard High Dividend Yield ETF is a top fund to own in retirement.
Diversification at its finest
Tim Brugger (Sector SPDR Trust SBI): With the growth of cutting-edge markets including cloud computing, Internet of Things (IoT), faster wireless networks, and machine learning expected to skyrocket as the world becomes increasingly digitized, the tech and telecommunications industries offer a world of upside.
Some retired investors may consider the tech and telecom industries a tad aggressive, but including a growth-oriented ETF like the Sector SPDR Trust SBI -- formerly known as the Technology Select Sector SPDR Fund -- for a portion of a portfolio to combat inflation is worth consideration. While Sector SPDR's 1.5% dividend yield is nice, it's the broad exposure the ETF offers to some of the world's largest tech and telecom providers that warrant inclusion on this list.
The objective of the ETF is to track the performance of the S&P 500's Technology Sector, which is up 12.5% this year. Sector SPDR Trust has climbed 13.1% year to date, which is right in line with expectations and a good indication that the ETF is delivering as promised.
Unlike some tech-focused ETF's, Sector SPDR Trust's diversification across the entire tech and telecom industries, rather than a particular segment such as semiconductors or wireless communications, helps to minimize risk while still providing retired investors much-needed growth potential. Though the other two ETFs discussed here are sound income-producing alternatives, conservative growth shouldn't be overlooked, which is why the Sector SPDR Trust warrants a long look.
Get broad exposure to real estate without paying a premium price
Matt DiLallo (Vanguard REIT ETF): Real estate is an excellent investment option for those in retirement because it has a low correlation to the stock market, which means values shouldn't sell-off to the same degree as stocks during a downturn. Further, real estate investments typically throw off steady cash flow, which gives retirees another source of income. While there are many real estate options to choose from, the Vanguard REIT ETF is a top choice for retirees to get broad exposure to the sector.
Currently, the Vanguard REIT ETF holds shares of 157 real estate investment trusts (REITs). These REITs own a variety of different property types, including office buildings, hotels, apartments, senior living communities, self-storage facilities, and data centers. Because long-term leases typically underpin those assets, these REITs collect predictable cash flow from those rent payments, which enables them to pay healthy dividends. Vanguard REIT ETF receives these dividends and then redistributes them to its investors. At the moment, the Vanguard REIT ETF yields 4%.
Another characteristic of the Vanguard REIT ETF is its ultra-low expense ratio. At just 0.12%, this REIT ETF's expense ratio is more than 90% below that of similar funds, which can make a significant difference over the long term. For example, a hypothetical $10,000 investment that earns a 9% annual return over 10 years would result in an investor paying $2,777 in fees to a competing REIT ETF versus paying just $283 in fees paid to the Vanguard REIT ETF.
That combination of a low-risk income stream backed by real estate and minimal fees make buying into the Vanguard REIT ETF a great way to stay invested while in retirement.