Are you looking for the simplest path to a seven-figure retirement nest egg? If so, owning individual stocks isn't it. Even names that qualify as true "forever" holdings when you buy them will need regular monitoring and occasional replacement. If you truly want the simplest and most likely passive path to $1 million, exchange-traded funds are a far better bet.
To this end, here's a rundown of four index funds that could collectively get you to the million-dollar mark sooner and more safely than you might think is possible. You can fine-tune the net risk this suggested portfolio poses by adjusting how much of your money you allocate to each one.
The Technology Select Sector SPDR Fund
Sector-based ETFs have proven frustrating for more than a few investors. They obviously expose owners to a particular sector's performance. Roughly half of all major sectors routinely underperform the S&P 500 (^GSPC 0.94%), however, not without enough tangible upside to offset this downside. At the same time, if their purpose is to offer exposure to a particular sliver of the market for only a period of time, finding the perfect entry and exit points is practically impossible.
Image source: Getty Images.
Don't give up on the idea of focusing on a single opportunistic sector, though. Just change your tack. Specifically, buy and hold a sector-based ETF that you have every reason to expect above-average performance from for the indefinite future.
That's technology, of course. The Technology Select Sector SPDR Fund (XLK 1.49%) will do the trick nicely. Sure, you'll experience above-average volatility in exchange for your market-beating gains. You'll also need to be particularly patient with this pick, waiting for the ETF to recover from its oversized setbacks when it stumbles.
It's worth it in the long run, though. The tech business isn't going away anytime soon. If anything, the creation of newer and better technologies is allowing us to create even newer and better tech. That cycle's never likely to end.
The Technology Select Sector SPDR Fund is built to reflect the collective cap-weighted performance of the S&P 500's technology stocks. The popular Invesco QQQ Trust (QQQ 1.25%) performs similarly, but it doesn't include a few of the NYSE-listed tech names (like Salesforce) that you'd also probably like to own a small piece of. It also holds several non-tech Nasdaq-listed stocks you probably wouldn't particularly care about owning.
iShares Core S&P Mid-Cap ETF
Plenty of investors start and finish their ETF-picking journey with the SPDR S&P 500 ETF Trust (SPY 0.83%), meant to mirror the S&P 500 itself. And to be clear, there's nothing wrong with that strategy. After all, an investment in this fund offers you exposure to 80% of the U.S. stock market's total market capitalization, plugging you into the broad market's long-term rising tide.
There's an overlooked opportunity quietly hiding within the other 20% of the market, though -- an opportunity that actually reliably outperforms the popular S&P 500 benchmark. Mid-cap stocks actually have a better long-term track record. Indeed, as the graphic below illustrates, the S&P 400 MidCap index has performed about 25% better than the S&P 500 over the course of the past 30 years.
Data by YCharts
Granted, it's been more volatile. It's been worth it, though.
And this superior performance makes sense when you give it a bit of thought. Most midsize companies are in a sweet spot for growth, past their wobbly start-up years, but in front of the growth that is driven by interest in their new product or service. Fast-growing cybersecurity outfit CrowdStrike, for instance, recently graduated from the S&P 400 to the S&P 500 thanks to several years of strong forward progress.
The iShares Core S&P Mid-Cap ETF (IJH 1.11%) is a great low-cost exchange-traded fund based on the S&P 400 index.
ProShares S&P 500 Dividend Aristocrats ETF
While growth stocks certainly play an important role in getting your retirement fund to the $1 million mark, don't dismiss the power of steady dividend payments paired with the reinvestment of those dividends in the stocks -- or ETF -- paying them.
Enter the ProShares S&P 500 Dividend Aristocrats ETF (NOBL 0.50%).
Just as the name suggests, it's built to mirror the performance S&P 500 Dividend Aristocrats Index®. (The term Dividend Aristocrats® is a registered trademark of Standard & Poor's Financial Services LLC.) These are simply S&P 500 stocks that have raised their dividend payments for a minimum of 25 consecutive years, although most of them have done so for far longer. Johnson & Johnson, Coca-Cola, and Procter & Gamble have each done so for well over 60 years, for example.
This track record in and of itself doesn't guarantee an underlying stock's strong performance. It does, however, strongly correlate with strong returns. Number-crunching done by mutual fund company Hartford indicates that, since 1973, stocks that have regularly grown their yearly dividend of any size produce average annual net gains of more than 10%. That's more than twice as much as non-dividend payers. The company explains, "corporations that consistently grow their dividends have [also] historically exhibited strong fundamentals, solid business plans, and a deep commitment to their shareholders."
In other words, quality dividend stocks can effectively serve as a growth investment. They just achieve that growth in a different way.
SPDR S&P 500 ETF Trust
Finally, add the aforementioned SPDR S&P 500 ETF Trust to your list of exchange-traded funds that could help you build a million-dollar retirement portfolio.
It's a predictable -- almost cliché -- recommendation. There's a good chance you already own a stake in this fund, in fact. Adding to an existing position wouldn't be wrong though, while opening a new position in this ETF would be a smart first next move.
Unlike any of the other three ETFs in focus here, this one isn't going to beat the market simply because it is the market. After all (and as was noted), the S&P 500 represents 80% of the entire U.S. stock market's total capitalization. That's why it's considered not just a broad market barometer, but also a fair comparative benchmark -- a benchmark that most actively managed mutual funds don't beat, by the way.
Data from Standard & Poor's indicates that over the course of the past three, 10, and 15 years, not once have more than 20% of these funds outperformed the index. That's why so many people wisely opt to just buy and hold this index fund. That is, given the low likelihood of actually outperforming the overall market, the safer and smarter bet is simply betting on the S&P 500 itself.
So why bother with any of the other three ETFs discussed above? Partially because they've got a better chance of beating the market in the long run, but without much additional net risk. Mostly, though, because their performance will likely ebb and flow at least a little out of sync with the S&P 500. This will help smooth out your portfolio's overall volatility, allowing you to stick with your allocation for a longer period of time. Being able to be comfortably patient is no small matter.
