The stock market remains the best way to build wealth over long periods of time, but choosing individual stocks is not for everyone. Exchange-traded funds, or ETFs, can be a smart way to get stock exposure in your retirement account without paying excessive fees. With that in mind, here are three excellent ETFs that can get you started on your way to a financially comfortable retirement.
Warren Buffett's favorite investment
Billionaire investor Warren Buffett has said several times that the best investment most people can make is a low-cost S&P 500 index fund like the Vanguard S&P 500 ETF (NYSEMKT:VOO). The basic idea is that such a fund will benefit from the success of American business, and will keep the gains in your pocket, not in the pocket of a fee-seeking mutual fund manager.
In fact, Buffett has advised his own wife to invest the money she inherits in a fund like this, much to the surprise of many Berkshire Hathaway investors.
The Vanguard S&P 500 ETF, as the name implies, invests in the 500 components of the S&P 500 index, weighted proportionally. And because its expense ratio (fee) is a rock-bottom 0.04% per year, the fund has virtually matched the index's performance over time. To illustrate how low this fee is, if you were to invest $10,000 in the fund, your total expenses for the first year would be just $4.
A defensive ETF with high income
Dividend stocks tend to outperform their non-dividend counterparts during tough economic times, as they tend to be more stable and mature businesses, and the dividend helps to create a price floor as the share price drops. In addition, if you're investing for retirement, you'll eventually want to draw income from your investments.
For these reasons, the Vanguard High Dividend Yield ETF (NYSEMKT:VYM) could be a smart addition to your retirement portfolio. The fund invests in a portfolio of 412 stocks in all sectors except real estate, all of which pay higher-than-average dividend yields. As of this writing, the fund yields 2.9%, and top holdings include Microsoft, ExxonMobil, Johnson & Johnson, and JPMorgan Chase. If you notice, these high-dividend stocks are among the strongest players in their respective industries.
Finally, the Vanguard High Dividend Yield ETF charges a low expense ratio of 0.09%, so you'll get to keep most of the dividends the fund pays out.
Dividends and growth
Since the Vanguard High Dividend Yield ETF specifically excludes REITs, my third retirement ETF choice is one that specifically focuses on real estate.
The Schwab U.S. REIT ETF (NYSEMKT:SCHH) tracks a weighted index of major equity real estate investment trusts -- that is, companies that own investment properties. Its index, the Dow Jones US Select REIT Index, tracks about 120 of the largest equity REITs as of this writing. Top holdings include mall REIT Simon Property Group, self-storage REIT Public Storage, and industrial REIT Prologis.
Because of their favorable tax treatment, REITs tend to pay above-average dividends, and its current 3.1% dividend yield is the highest of the three ETFs discussed here. Additionally, REITs have the potential to produce excellent growth over time as their underlying properties grow in value. This can combine for some pretty impressive total returns. And with an expense ratio of just 0.07%, this can be an excellent way to add the benefits of real estate investing to your retirement portfolio without actually buying an investment property yourself.