Retirement is a general phenomenon and planning ahead is difficult in an uncertain economic environment. Americans need to plan their savings carefully for a steady source of income post retirement.
According to the recent 2014 Retirement Confidence Survey, the confidence level of Americans to retire comfortably has picked up from record lows to 18% this year from 13% last year thanks to an improved financial market and higher property prices. However, this confidence is limited to only high-income earners or those with IRAs and 401(k).
This is especially true as more than one-third of retirees still have less than $1,000 in savings and investments, and are looking for various ways to make their capital grow. While investing in the financial stock market and various retirement plans are certainly options, these carry higher risk and are less tax effective (read: Most ETFs Are Tax Smart, Is Yours?).
On the other hand, ETFs are gaining popularity among investors struggling to ramp up their retirement savings. Investor focus on ETFs stems from their low cost, simple, transparent and tax efficient nature plus the dynamic growth potential that these offer. Further, ETFs provide diversified exposure to various asset classes, including domestic and international stocks, bonds and commodities.
There are a number of choices available in the ETF world for investors to accelerate their retirement savings by limiting expenses. Below, we have highlighted five ETFs that could prove extremely beneficial and standout in specific categories over the long term (read: 3 ETFs You Can Love Forever).
Investors should note that the combination of these products could also make compelling choices, limiting the risk of equity, bonds and commodity markets.
Vanguard Dividend Appreciation ETF ((VIG - ETF report) )
Though Fed tapering has hurt dividend stocks and ETFs in recent months, these have accounted for more than 40% of total returns over the long term. The increase in dividend payments is likely to continue as most large U.S. companies have huge cash piles on their balance sheet and are in a position to increase payouts to shareholders.
Investors could easily park their money in these ETFs and VIG could be an excellent pick. The fund follows the Nasdaq Dividend Achievers Select Index, which is composed of stocks of high quality companies that have a record of increasing dividends for at least 10 years. Holding 146 stocks in its basket, the product is pretty spread across various securities as none holds more than 4.1% of total assets.
However, industrials and consumer goods take the top two spots at 22.4% each while consumer services and oil & gas round off the next two. The fund has amassed $18.9 billion in its asset base and trades in volume of under 1 million shares per day. Expense ratio is low, coming in at 0.10%. The product returned more than 137% over the past five years.
Vanguard Total Stock Market ETF ((VTI - ETF report) )
Broad exposure to the U.S. equity market with diversification benefits across a number of sectors and securities provides a well-balanced retirement portfolio even during unpredictable times and lessens the risk of specific sector or security downturn.
VTI follows the CRSP US Total Market Index, holding a large basket of 3,629 securities. Each security holds less than 2.4% of total assets while financials, technology, industrials and consumer services make up for nice sector mix in the portfolio.
It is one of the largest and popular funds in the entire ETF world with AUM of nearly $41.5 billion and average daily volume of about 3 million shares. The product is also the low cost choice, charging just 5 bps in fees and expenses. The fund gained nearly 173% over the past five years (read: 3 Dirt Cheap Top Ranked ETFs to Buy Now).
SPDR Barclays Capital High Yield Bond ETF ((JNK - ETF report) )
With the prospect of rising interest rates sooner than expected, high yield bond and the related ETFs are currently out of investors’ favor. But these have proved to be strong performers over the long term and might remain so in the future as well. This is because an improving U.S. economy will continue to keep default rates at lower levels, making these junk bonds attractive.
While there are several options available in this space, investors could consider JNK. This ETF follows the Barclays High Yield Very Liquid Index, charging 40 bps in annual fees from investors. With AUM of $10.2 billion, the fund holds 696 low-rated (‘BBB’ and lower) corporate bonds. Volume is good as it exchanges nearly 4.2 million shares a day.
The product has a modified adjusted duration of 4.13 years and average maturity of 6.63 years. In terms of yield, the ETF pays out 5.89% in dividends, 4.86% in 30-day SEC yield and 5.98% in yield to maturity. JNK delivered strong returns of 116% over the past five years.
iShares TIPS Bond ETF ((TIP - ETF report) )
Though inflation is currently low, some concerns have started to build up lately on rising food prices due to droughts in California, unusually cold weather in other parts of the country and specific commodity anxieties. Further, the prospect for interest rate hikes in the middle of 2015 suggests that consumer demand in the world’s largest economy would be strong enough to push up inflation toward the Fed target of 2%.
As such, investors could definitely look to the ultra-safe Treasury Inflation-Protected Securities (TIPS) ETFs in order to protect against future inflation. This could be easily done by investing in TIP, which tracks the Barclays U.S. TIPS Index and holds 39 securities in its basket (read: Breakfast Turning Dearer: 3 ETFs to Pick).
About three-fifths of the portfolio is allocated to mid-term bonds, 25% to long term and the rest goes to the short term, resulting in weighted average maturity of 8.46 years. The fund has gathered $12.6 billion in its asset base while trades in average volume of more than 720,000 shares a day. It charges 20 bps in annual fees from investors and added just 23.94% in the past five years.
PowerShares DB Commodity Index Tracking Fund ((DBC - ETF report) )
In order to tap the growing food prices and never-ending demand for food, investors could also consider safe investments in broad commodity ETFs like DBC. This fund tracks the DBIQ Optimum Yield Diversified Commodity Index Excess Return, which delivers returns through an unleveraged investment in the most heavily traded futures contracts on physical commodities, plus the rate of interest on specified T-Bills.
In total, the index holds 14 different commodities in its basket with heavyweights going to the energy (57%) space, followed by agriculture (21%) and a 21% combined allocation to metals both industrial and precious (see: all the broad commodity ETFs here).
The fund charges a relatively higher 93 bps in annual fees while tight bid/ask spread minimizes the additional cost for the fund thanks to solid volume of more than 1.9 shares per day. The product has managed assets of $5.5 billion and produced returns of 29% over the past five years.
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