Exchange traded funds provide investors with the ability to capture entire market segments and assets through quick trades. However, the retirement investor should select ETFs based on other qualities.
Investors saving toward their Golden Years should select ETFs based on what they offer in terms of cost, predictability and total return, writes Mitch Tuchman for Forbes.
When filling out your retirement portfolio, investors should consider a couple key points:
- Costs. Over time, the compounding effect on expenses paid out to the fund operators will add up. More investors are turning to low-cost ETFs as an alternative to active mutual funds that charge well over 1% in management fees. In comparison, the no-frills, plain-vanilla passive index-based ETF has an average 0.58% expense ratio, and the cheapest broad market ETF comes with a 0.04% expense ratio. [Top-Rated ETF Platforms for Cost-Conscious Investors]
- Indexing. Most active mutual funds that try to beat a benchmark index have fallen short. If you can’t beat the index, join’em. With most ETFs, investors can passively follow the underlying, benchmark index performance, minus fees.
- Tracking error. All ETFs don’t perfectly mirror Viagra their underlying benchmarks, and some niche or specialized ETF strategies can experience diverging performances between the ETF and the benchmark. Long-term investors should hold core broad, long-only ETFs to minimize this indirect cost. [How Tracking Error Can Impact ETF Performance]
- Mind the spread. ETFs, like stocks, trade on an exchange. As such the bid/ask spread can eat away at returns. Potential investors should be aware of how wide the bidding and asking price of an ETF is before executing trades, especially for those who rebalance holdings on a frequent basis. [What is an ETF? — Part 7: Bid/Ask Spread]
- Emotions. Investors should have a strategy in place to limit emotional, panic trades over short-term moves. For instance, at ETF Trends, we follow the 200-day exponential moving average to provide us a trend following strategy. If the ETF crosses over the 200-day EMA, it is a buy signal, but if the fund dips below the trend line, consider exiting the position. [An ETF Trend-Following Plan for All Seasons]
For more information on investing toward retirement, visit our retirement category.