Investing during retirement is a very different animal from investing before retirement. Retirees need most of their income to come from diversified portfolios that protect their nest egg from large drawdowns in a bear market.
Below, three Fools lay out the case for investing in WisdomTree LargeCap Dividend ETF (NYSEMKT:DLN), Schwab U.S. Aggregate Bond ETF (NYSEMKT:SCHZ), and Vanguard Health Care ETF (NYSEMKT:VHT), three low-cost index funds that are fit for investors who want to stay invested for the long haul.
Yield with upside
Daniel Miller (WisdomTree LargeCap Dividend): Investing is a great way to build wealth over the long term, but many people don't have the time or background to properly maintain their own portfolio of individual stocks. If you're one of those investors, yet you'd like to maintain some control over your investments, you can pick a handful of index funds to stay in the investing game with less risk. And WisdomTree LargeCap Dividend ETF (NYSEMKT:DLN) is an excellent option.
This fund has a dividend-focused strategy that reduces risk by offering broad exposure to large-cap U.S. dividend-paying stocks. It even takes a slight contrarian and value approach, increasing its holdings in stocks when they become cheaper relative to their dividends and their peer group. Some of the fund's largest holdings include juggernaut names such as Apple Inc., Microsoft, and AT&T, but the fund is so diverse that those three holdings combine to make up barely 10% of total assets.
WisdomTree's fund has a trailing 12-month dividend yield of 2.54%, which is well above the S&P 500 average yield of about 1.91%. Further, its expense ratio of 0.28% and low turnover of 11% make it a cheap and competitive option among similar funds. If you're looking for a safe fund offering a combination of income and upside, WisdomTree LargeCap Dividend ETF is a great way to keep you in the investing game.
The lowest-cost bond index ETF
Jordan Wathen (Schwab U.S. Aggregate Bond ETF): When it comes to retirement, it's time to start taking some risk off the table. The Schwab U.S. Aggregate Bond ETF allows you to diversify your portfolio with more bond exposure (reducing risk) while slashing the expenses you pay: Its expense ratio is a next-to-nothing 0.04%.
Bond fund expenses have come down over time, but not to the extent that bond yields have. Short-term bond funds now yield little more than 2% to 3% per year, but the average bond mutual fund costs an eye-popping 0.51% per year, according to the Investment Company Institute, eating up as much as one-fourth of pre-fee returns. Keep in mind that fund fees are taken out of distributions paid to investors. Thus, the fees you pay directly reduce the amount of income you earn in retirement.
The Schwab U.S. Aggregate Bond ETF allows you to have your cake and eat it too. The fund's underlying bond investments have an average yield to maturity of 2.6% from a super-safe portfolio of investment-grade bonds, roughly half of which are government or government-backed issues. It remains the lowest-cost way to add high-quality bond exposure to your portfolio.
Healthcare will remain a growth industry
Jason Hall (Vanguard Health Care ETF): While politicians argue about how to drive down healthcare spending and costs -- a serious issue in the United States -- there is an inexorable trend happening around the world: Billions of people are growing older, and this aging population will drive a significant amount of healthcare spending over the next several decades. This is especially true as life expectancies increase in both developed and developing economies.
Furthermore, we're entering a golden age of healthcare, with personalized medicine set to significantly improve patient outcomes across a swath of illnesses and potentially increase life expectancies even more. There are already diseases being cured that only a few years ago were the equivalent of a death sentence. The best part for investors is these major advances in treatment and care are only just getting started.
Since most of us don't have the knowledge or expertise to pick the healthcare companies that will be the biggest winners, the Vanguard Health Care ETF is an excellent way to gain exposure to the potential.
This ETF tracks the MSCI US Investable Market Health Care 25/50 Index. It has beaten the S&P 500 handily since inception, and it only carries a 0.10% expense ratio (that's $1 per year per $1,000 invested). Looking ahead, I think the prospects are great that this index fund will continue to outperform the market for many years to come.