Some retired investors have been hesitant about adopting exchange traded funds because of the investment charges fees. However, one should weigh the benefits against the potential costs first.
ETFs can become a vital component of an retirement investment strategy, writes Mike Sorrentino for MarketWatch.
The industry has crafted a range of new strategies that allow retirees to create diversified portfolios with less volatility and diminished exposure to unnecessary risks. However, like traditional open-end mutual funds, ETFs charge a fee to invest in the packaged product.
While some investors may be put off by the fees and turn to investing in individual securities, one should ask what ETFs can provide in exchange for an annual cost.
For instance, Sorrentino pointed to ETFs’ beneficial attributes like diversification, liquidity and asset allocation. [Advisors, Retail Investors Seen Boosting use of ETFs]
When building an investment portfolio, investors should be diversified. An investor can meticulously pick out individual securities to fill out their fixed-income and equity portfolios. Alternatively, an investor could choose a few ETFs to gain exposure to hundreds if not thousands of securities. [Efficiently Save Toward Retirement with Cheap ETFs]
For example, an investor can build a diversified portfolio of domestic stocks, international stocks and bonds with three ETFs, such as the Vanguard Total Stock Market ETF (NYSEArca: VTI), Vanguard Total International Stock ETF (NYSEArca: VXUS) and Vanguard Total Bond Market ETF (NYSEArca: BND). VTI holds 3,809 U.S. stocks, VXUS includes 5,490 foreign companies and BND includes 16,470 bond securities. [Three Low-Cost ETFs for a Diversified Portfolio]
Liquidity is also a major concern among investors, notably those that dabble with fixed-income securities, which can take days or weeks with high commission charges. Alternatively, ETFs can be bought and sold throughout the day at the same cost as trading individual stocks on a brokerage account – some brokerage platforms even allow commission-free ETF trades as well. [Six Popular Commission-Free ETF Trading Platforms]
Investors will also find that using ETFs makes it easier to manage asset allocation and efficiently gain exposure to broad market segments. In contrast, the added analysis and risk that single securities bring to a portfolio may not be worth the return for most retirees. However, this does not mean that an investor should exclude their favorite stock picks entirely.
For more information on investing toward retirement, visit our retirement category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.