Investing for retirement doesn’t have to be, and shouldn’t be, hard. You don’t have to spend lots of time researching and investing in individual companies; you can just rely on exchange-traded funds (ETFs). ETFs can provide instant diversification and the returns investors need to help accomplish financial security in retirement. Here are the only four types of ETFs you need for a well-rounded retirement portfolio.
1. An S&P 500 ETF
The S&P 500 tracks the largest 500 U.S. public companies and is one of the most popular indexes in the stock market. Considering the number of companies, their sizes, and their diversity, the S&P 500 is often considered a reflection of the market as a whole. Rarely are people’s sentiments of the market opposite of how the S&P 500 is doing.
Large-cap funds like the S&P 500 should be a core part of anyone’s retirement portfolio. Due to the size of large-cap companies, they generally have more resources and money to weather down periods in the market, so they’re more stable than smaller companies. With this stability comes less chance for hypergrowth, but you don’t want the bulk of your portfolio in riskier investments.
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The S&P 500 ETF you choose doesn’t matter too much, as long as the fees aren’t higher. An S&P 500 fund like the Vanguard S&P 500 ETF (NYSEMKT: VOO) is low-cost (0.03% expense ratio), covers all 11 major sectors, and has a history of producing good long-term returns.
You want to have at least half your retirement portfolio in large-cap stocks.
2. A small-cap ETF
Small-cap companies are usually younger companies with a market capitalization — which is found by multiplying a company’s outstanding shares by its share price — between $300 million to $2 billion. Because of their relatively small size, small-cap companies tend to be riskier and more vulnerable to volatility, but they also have more room for hypergrowth. Once a company reaches a certain size, its chance for hypergrowth declines, but small-cap companies can be higher risk, higher reward.
You don’t want a large percentage of your retirement portfolio in small-cap funds, but you want some exposure.
3. A mid-cap ETF
Mid-cap companies are the sweet spot between the stability of large-cap companies and the growth potential of small-cap companies. Mid-cap companies generally have a market capitalization of $2 billion to $10 billion and can either be younger, growing companies or more established companies that operate in their niche part of their industry.
You don’t want your portfolio to only consist of the two extremes (large-cap and small-cap); you also want to have exposure to companies that operate in the middle ground. There are many mid-cap index funds that cover every sector you could want and have historically produced good long-term returns. Take the Vanguard Mid-Cap ETF (NYSEMKT: VO), for example, which consists of over 370 stocks and has returned 11.48% annually over the past 10 years.
4. A total international ETF
Every well-rounded investment portfolio includes non-U.S. companies. There are many great companies across the globe, so you never want to limit yourself to only U.S. companies. Picking foreign companies individually can be tougher than picking U.S. stocks because there are various factors investors should consider, like local political climate and economic stability.
Instead of focusing on individual companies, you should look for a total international ETF. The reason you want a total international ETF and not just an international ETF is because total international ETFs tend to include companies in both developed and emerging markets, while others may only include companies in one of the two. Like smaller-cap companies, companies in emerging markets are usually riskier, but they also have the chance for hypergrowth as they grow and their respective markets become more mature and developed.
You should aim to have around 20% of your portfolio in international stocks.
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Stefon Walters has positions in Vanguard Mid-Cap ETF and Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Vanguard Mid-Cap ETF and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.