3 ETFs to Help You Build Retirement Wealth

Make sure you're on track for a financially secure retirement with these exchange-traded funds.

Dan Caplinger
Dan Caplinger
Feb 23, 2017 at 11:21AM
Investment Planning

If you want to retire rich, you have to prepare for it throughout your career. Exchange-traded funds can be a good investment vehicle to use to build up retirement wealth, because their low costs and broad diversification can open up a wide range of different types of investments from which you can choose. Many ETFs aim to provide strong growth, but some are particularly useful to those who are trying to accumulate savings for retirement. The three below are some of the best ETFs to serve that purpose.

1. The broad-based approach

Stocks are a key part of a portfolio aimed at producing retirement wealth, and exchange-traded funds are available that can give you the broadest possible diversification. Vanguard Total World Stock Market (NYSEMKT:VT) is a solid pick that gives you exposure to stocks across the globe. The ETF tracks an index of global stocks that reflects the current market capitalization of the largest companies in the world. Currently, the fund has more than half of its assets invested in North America, with Europe, the Asia-Pacific region, and emerging markets making up the rest of the portfolio. With an expense ratio of just 0.14%, investors get cheap exposure even in markets that are ordinarily harder to access.

Mosaic-tile yellow and white spelling out ETF.

Image source: Getty Images.

Long-term returns for the Vanguard Total World Stock Market have been somewhat muted, in part because the ETF became available right before the financial crisis and stock market crash in 2008. Yet even with that handicap, the ETF has generated average annual returns of 5%, and a 19% return over the past year shows that the fund can participate in bull market rallies. With such a diverse investment mix, this Vanguard ETF is one way to invest in the entire market and feel comfortable about one's prospects going forward.

2. Going with a dividend approach

Retirement investors have to prepare for the eventual need for income, so getting invested in dividend-oriented exchange-traded funds can be a smart thing to do over time. One good choice is the Vanguard High Dividend Yield ETF (NYSEMKT:VYM), which focuses on above-average yielding stocks in the U.S. market. The fund has produced a solid track record of growth, with 7% average annual returns over the past decade, and nearly 14% returns on average in the last five years.

Some investors have been nervous that dividend stocks have become too expensive, and rising rates could lead to a drop in demand for dividend-payers that could hurt funds like the Vanguard ETF going forward. However, despite fairly high valuations, many high-yielding dividend stocks have blue-chip companies behind them that could weather a market storm well. Moreover, the ETF carries an SEC-defined distribution yield of more than 3%, outpacing the stock market by a dramatic margin, while charging just 0.09% in annual expenses. For income and growth, few ETFs offer a more attractive combination than Vanguard High Dividend Yield.

3. Get your dose of fixed income

Finally, balanced portfolios demand some exposure outside of the stock market, and as you get closer to retirement, finding a safe alternative to stocks becomes almost a necessity. Schwab US Aggregate Bond (NYSEMKT:SCHZ) is a good low-price alternative, with an expense ratio of just 0.04%.

The bond market hasn't been very favorable to investors lately, and the Schwab ETF reflects this with average annual returns of only about 2% over the past five years. Yet even though some investors fear rising interest rates that could eat into future returns, the Schwab ETF has a good mix of government, corporate, and mortgage-backed fixed-income securities with a safer profile than some of its peers. Bonds won't go up as much as stocks over the long run, and near-term returns could be poor. But the value of having bonds in one's portfolio has been substantial in the past, and the Schwab ETF provides low-cost exposure in a way that's smart for retirement investors.

These three ETFs aren't the only funds that are good for building retirement wealth, but together, they make a good starting point. By identifying your particular needs, you can come up with the right combination of these and other ETFs that are best-suited to you.