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4 ETFs to Keep You Invested After Retirement

By Matthew Frankel, CFP® – Updated Sep 8, 2017 at 2:21PM

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These ETFs can give you growth and income without too much risk.

Exchange-traded funds, or ETFs, that track certain indices, can be a smart way to get exposure to certain types of investments without taking on the risk of individual stock and bonds, and without the high fees of actively managed mutual funds. These four ETFs work especially well in retirees' portfolios, as they can provide the growth and income retirees want without unnecessarily high risk.

Name

Expense Ratio

Dividend Yield

Vanguard High Dividend Yield ETF (VYM 2.74%)

0.08%

2.90%

Vanguard S&P 500 ETF (VOO 2.64%)

0.04%

1.84%

iShares TIPS Bond ETF (TIP 1.29%)

0.20%

1.48%

Vanguard Total Bond Market Index Fund ETF (BND 0.84%)

0.05%

2.44%

Data source: TD Ameritrade. Expense ratios and dividend yields as of 9/5/2017.

An excellent stock ETF for retirees

All retirees should keep some of their portfolio invested in stocks, and the Vanguard High Dividend Yield ETF is my favorite stock ETF for retirees.

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Image Source: Getty Images.

The ETF invests in an index of about 400 stocks that pay above-average dividend yields, with top holdings such as Microsoft, Johnson & Johnson, and ExxonMobil. High-dividend stocks tend to be more stable than their non-dividend counterparts and therefore tend to weather recessions and corrections better.

In a nutshell, the Vanguard High Dividend Yield ETF pays retirees the income they need with the potential to grow over time, and with a level of volatility that allows them to sleep well at night. And with a expense ratio of just 0.08%, it's a rather cheap way to get all of these things.

Warren Buffett's favorite ETF

The Vanguard S&P 500 ETF is one of the lowest-cost ETFs available in the market, with a rock-bottom 0.04% expense ratio.

In a nutshell, this ETF is a good way to get broad exposure to stocks, which all retirees should have. The fund invests in all 500 stocks that make up the well-known S&P 500 index. This includes stable dividend-paying stocks, such as those that I discussed in the last section, as well as some higher-growth, but non-dividend names, such as Facebook and Amazon.com.

Billionaire investor Warren Buffett has said that a low-cost S&P 500 index fund is the best investment most people can make, and he chose this Vanguard example in particular for a now-famous bet he made that the S&P 500 would outperform a basket of hedge funds over a long period of time.

Protect your purchasing power

One major concern among retirees is inflation, which can eat away at your purchasing power. For example, if you buy 30-year bonds that pay you a total of $50,000 per year, your purchasing power from this income could fall to less than $21,000 by the end of the 30-year term, based on the historic average inflation rate.

The iShares TIPS Bond ETF is one potential solution. The ETF invests in U.S. TIPS, which are government bonds whose value rises with inflation, and can be a smart way to protect your portfolio from the effects of higher-than-expected inflation. Inflation has historically averaged about 3% per year, but it has climbed to double-digit rates in the past and could certainly do so at some point in the future.

An all-in-one bond portfolio

The Vanguard Total Bond Market Index Fund ETF, as the name implies, is intended to allow investors to get exposure to a broad variety of bond investments. And with $186 billion in total assets, it's a popular choice.

The fund invests in government, corporate, and international bonds, as well as mortgage- and asset-backed securities. While the fund invests in bonds with a variety of maturity dates, all have maturity dates of at least one year. As of July 31, 2017, the fund's assets are invested in 8,342 bonds with an average effective maturity of 8.3 years.

Long-maturity bonds pay higher yields, but are also more sensitive to interest rate fluctuations. On the other hand, shorter-duration bonds are more stable but pay lower interest rates. This ETF is a good compromise between the two.

Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Matthew Frankel has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon, Facebook, and Johnson & Johnson. The Motley Fool owns shares of ExxonMobil. The Motley Fool has a disclosure policy.

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Stocks Mentioned

iShares Trust - iShares TIPS Bond ETF Stock Quote
iShares Trust - iShares TIPS Bond ETF
TIP
$106.25 (1.29%) $1.35
Vanguard Whitehall Funds - Vanguard High Dividend Yield ETF Stock Quote
Vanguard Whitehall Funds - Vanguard High Dividend Yield ETF
VYM
$97.48 (2.74%) $2.60
Vanguard Bond Index Funds - Vanguard Total Bond Market ETF Stock Quote
Vanguard Bond Index Funds - Vanguard Total Bond Market ETF
BND
$71.77 (0.84%) $0.60
Vanguard Index Funds - Vanguard S&P 500 ETF Stock Quote
Vanguard Index Funds - Vanguard S&P 500 ETF
VOO
$336.98 (2.64%) $8.68

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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