Your 401(k) or IRA could probably benefit from the addition of high-growth investments, but you also want to make sure you're not taking on too much risk with your retirement savings. Luckily, there are ETFs that will help your retirement account beat the stock market while providing protection against common threats that could sink your plan. Finding an ETF that's focused on the right stock market niche will set you up for larger assets and a better retirement a few decades down the line.
Higher growth might require additional risk
It's always important to balance growth and risk, so we have to recognize which parts of a portfolio are optimal for providing each. Your retirement account allocation should include some bonds as you get older, and it's probably a good idea to hold some stable value stocks, such as Dividend Aristocrats. These are useful investments to limit risk and reduce volatility, but you have to allocate a little more aggressively with other parts of your portfolio if you want to achieve high growth.
For that purpose, I'm only considering high-potential investments that I wouldn't plan to touch for multiple decades. I don't need to care as much about volatility in the short term or medium term, because I'm not planning on selling. That long-term potential should turn any bearish periods into temporary deviations from an overall upward trend. That's important because these investments will definitely be more volatile than an index fund.
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ETFs are also great tools to provide diversification, which helps manage the risk investors take with their nest egg. It removes the potential catastrophe of any one stock dragging the account down. A niche ETF provides focused exposure to a high-growth economic megatrend, without simply replicating the performance of the total stock market. It's also a good idea to pick a fund that holds a good amount of small-cap and mid-cap stocks because some of these will deliver explosive growth to become tomorrow's tech giants.
With that in mind, I want to avoid ETFs that track a broad stock index, but I have to balance that with the right level of diversification.
The New Economies ETF
There are dozens of ETFs that would probably fulfill this role in your portfolio effectively, but one of my favorites right now is the SPDR S&P Kensho New Economies Composite ETF (NYSEMKT: KOMP). This ETF has about 400 holdings, and it is spread across prominent disruptive technological trends. These include autonomous vehicles, nanotechnology, genetic engineering, 3D printing, and other innovation at the forefront of tomorrow's economy.
The selection methodology uses proprietary artificial intelligence to scrape corporate filings for keywords that show which companies are participating in these disruptive trends. Importantly, the fund is equal-weighted, with slight adjustments based on management's assessment. As a result, more than half of the portfolio is allocated to small-cap and mid-cap stocks, which tends to increase both risk and growth potential. That's the exact sort of feature required to deliver returns above the market as a whole.
The Kensho New Economies Composite ETF carries a 0.2% expense ratio, which is modest for a fund management strategy targeting such a narrow niche. That's great because you can get returns without giving up too much for management fees each year. The fund is also relatively large and liquid, with nearly $2 billion in assets under management and an average daily trading value above $20 million. This means that it's relatively easy and inexpensive to buy and sell shares, and it will keep you from incurring higher-than-necessary expenses to trade.
There are plenty of great ETFs that provide similar potential. Some are more diversified with lower expense ratios. Others go in the opposite direction with a super-focused, highly analytical approach that requires higher fees. I like the balance provided by the Kensho fund. The way it's put together provides extra diversification without simply focusing on larger, established companies, which is rare. Many of the alternatives rely heavily on the performance of a small group of stocks.
