As we scramble to put enough away for life after work, most Americans have not amassed enough to live comfortably in their Golden years, but exchange traded funds can help investors realize their goal.
“We’re facing a crisis right now, and it’s going to get worse,” Alicia Munnell, director of the Center for Retirement Research at Boston College, said in a New York Times article. “Most people haven’t saved nearly enough, not even people who have put away $1 million.”
Conventional financial advice points investors toward fixed-income assets as people approach retirement. Investors are also currently stuck in a low yield environment. However, rates are expected to rise, but this is not necessarily a good thing for fixed-income portfolios. For instance, the climb in yields on the 10-year Treasury has generated the largest monthly bond market loss in nine years.
Nevertheless, investors can utilize various ETF strategies to help mitigate interest rate risk. For instance, floating rate note ETFs come with a variable interest rate that adjusts to the prevailing interest rate, which help shield investors against interest rate hikes. [Floating Rate ETFs to Hedge Against Rising Rates]
ETFs in this category include iShares Floating Rate Note Fund (NYSEArca: FLOT), SPDR Barclays Capital Investment Grade Floating Rate (NYSEArca: FLRN) and Market Vectors Investment Grade Floating Rate (NYSEArca: FLTR).
Additionally, short-duration bond ETFs are also popular choices in the fight against rising rates. Some short-duration ETFs include Vanguard Short-Term Bond ETF (NYSEArca: BSV) and iShares Barclays 1-3 Year Credit Bond Fund (NYSEArca: CSJ). [Investors Flock to Low-Duration ETFs for Rising Rate Protection]
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Bernstein Global Wealth Management calculates that at a 4% withdrawal rate, an inflation-adjusted portfolio that is 100% invested in bonds would have a 38% chance of running on empty in an investor’s lifetime. At a 3%$ withdrawal rate, the chances decrease to 14%.
According to a recent Federal Reserve Bank of New York study, increasing stock allocations to a portfolio can reduce the risk of outliving your savings, but the downside is an increased risk of higher losses.
ETF Investors, though, can take broad strokes with the equity markets to mitigate risks. For example, The SPDR S&P 500 (NYSEArca: SPY), PowerShares Nasdaq 100 (NasdaqGM: QQQ) and SPDR Dow Jones Industrial Average (NYSEArca: DIA) provide exposure to the major U.S. stock market indices. ETFs also provide access to a myriad of other broad asset classes, both in domestic and overseas markets.
Broad dividend-oriented ETFs also provide similar exposure but also come with extra income on the side. Some of the largest options include Vanguard Dividend Appreciation ETF (NYSEArca: VIG), iShares Dow Jones Select Dividend Index Fund (NYSEArca: DVY) and SPDR S&P Dividend ETF (NYSEArca: SDY).
Moreover, ETFs come with low annual fees, which help keep returns and income in the investors’ pockets. Specifically, U.S.-listed ETFs have an average annual expense ratio of 0.61%, and some of the cheapest broad index-based ETFs cost as little as 0.04%. In comparison, the average expense of all balanced mutual funds is around 1.26%, writes Scott Burns for Houston Chronicle.
For more information on saving toward retirement, visit our retirement category.
Max Chen contributed to this article.