Planning for retirement can feel like a high-stakes game, but choosing the right investments doesn't have to be stressful. Consider some exchange-traded funds (ETFs) that track the performance of a robust market index.
These index ETFs come with the superpowers of reliable performance, low management fees, and solid dividend payments. They're perfect for retirees who want to keep things simple while still making smart financial moves.
The three index ETFs below are particularly well-suited for retirees. These options are tailored to support your financial needs in your senior years. (You should check out a different article if you're looking for dividend-focused ETFs to set up your savings for a retirement many years down the road.)
NYSEMKT: VOO
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Tried and true: Vanguard S&P 500 ETF
The S&P 500 market index is a familiar name, tracking the market performance of 500 large American companies. A research team from S&P Global does the heavy lifting of defining the list of S&P 500 stocks and calculating its weighting based on each stock's market cap.
All Vanguard has to do is manage a real-money portfolio of that exact list, using the same holding proportions as the original market index. The result of that simple process is the Vanguard S&P 500 ETF (VOO 0.07%).
Most of that work can be automated, and Vanguard charges extremely low management fees -- merely 0.3% -- for its index-based service. The average fund of large domestic stocks charges 0.78% in annual fees, according to Morningstar data quoted by Vanguard.
Those ultralow fees make a big difference in the long run. Imagine investing $10,000 in a mutual fund with an average annual return of 12.8%, which is the Vanguard S&P 500 fund's real performance over the last 10 years.
- With a 0.78% annual fee, your investment would more than triple in value over the next decade, resulting in a $31,114 value with $2,236 in fees paid along the way.
- Vanguard's low-cost fund would save you a lot in fees. After 10 years, you'd have $33,261 in the bank, having paid less than $89 in fees.
That's a significant difference. It's easy to see how low-effort managers of index funds can deliver superior long-term results to their clients.
NYSEMKT: VYM
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Balanced and well-rounded: Vanguard High Dividend Yield ETF
Many retirees look for generous dividend payments. A steady, low-risk flow of cash payouts every quarter isn't just a robust strategy for building your retirement savings over the years -- it's also an effective way to provide a reliable income stream during retirement. By focusing on high-yield dividend ETFs like the appropriately named Vanguard High Dividend Yield ETF (VYM 0.40%), retirees can enjoy the balanced benefits of income generation and potential capital appreciation.
This fund tracks the FTSE High Dividend Yield index. Managed by the London Stock Exchange Group, this index starts from a complete list of stocks on the U.S. markets, excluding real-estate investment trusts (REITs). The resulting list is sorted by dividend yield, and the index consists of roughly the top 500 names.
As such, this Vanguard fund currently holds 553 high-yielding stocks. The three largest holdings are microchip giant Broadcom, money center bank JPMorgan Chase, and oil titan ExxonMobil.
The fund currently offers a 3% yield, far above the 1.3% yield seen in the Vanguard S&P 500 ETF. There's a trade-off, of course. Due to its focus on generous dividend payments, which often come from lower-growth companies, the fund typically lags behind the S&P 500 index. But that's not a problem if you're more interested in dividend payouts than capital gains.
This strategy can provide financial stability and consistent income, which are crucial for a secure and comfortable retirement. The Vanguard High Dividend Yield ETF gets the job done with low fees and robust yields.
NYSEMKT: AGG
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Generous dividends: iShares Core US Aggregate Bond ETF
Finally, if you want to go all-in on income-friendly bonds, consider the iShares Core U.S. Aggregate Bond ETF (AGG 0.17%). This ETF mirrors the content of the Bloomberg U.S. Aggregate Bond index, commonly known as the "Agg."
Again, the fund manager lets someone else do the difficult work of selecting specific investments, and everything is highly automated. That's why fund manager Blackrock can match Vanguard's rock-bottom costs and offers a 0.03% annual fee on this ETF.
The fund owns 11,712 different bonds (and not a single stock), with a heavy focus on papers from the U.S. government. The U.S. Treasury is the leading issuer of these bonds, with a total weight of 43.4%. The largest private corporations on the list are money-center banks, but none of them account for more than 0.6% of the fund's bond holdings.
This ETF is known for its stability and income generation. It provides a reliable source of income through its investment-grade bond holdings, making it a suitable choice for retirees who prioritize steady dividends and lower risk. Its effective yield is a robust 3.4% today.
The right index ETF to serve your needs
Each of these three ETFs serves a unique purpose for retirees, catering to different aspects of a well-rounded investment strategy.
- The Vanguard S&P 500 ETF provides reliable growth through diversified exposure to large-cap U.S. stocks, ideal for those seeking robust long-term returns.
- The Vanguard High Dividend Yield ETF balances income generation and potential capital appreciation by focusing on high-yield dividend stocks, offering a diversified approach that includes steady cash payouts and reduced volatility.
- The iShares Agg ETF focuses on income and stability through a broad range of U.S. bonds, making it perfect for retirees who prefer steady dividends and very low market risk.
