One of the main benefits of diversification is that you don't have to guess which stocks will be up or down in a given period. That also happens to be one of the benefits of investing in exchange-traded funds (ETFs), which offer exposure to dozens or thousands of companies with the ease of buying and selling a single stock. Put them together and their appeal is obvious for investors without the time or desire to research individual stocks.
There are lots of ways to let the broader market do your work for you as you approach or enter retirement. For investors looking for a well-rounded retirement portfolio, start with these four ETFs.
1. Vanguard S&P 500 ETF
The Vanguard S&P 500 ETF (NYSEMKT:VOO) mirrors the S&P 500 index, which tracks the 500 largest stocks traded on the U.S. markets. The S&P 500 is widely seen as the benchmark you want to beat if you're going to invest in individual stocks. There's no shame in putting your money to work with the likes of Apple, Microsoft, and Alphabet.
The popular SPDR S&P 500 ETF Trust offers you the same diversification, but there's a catch -- it has a higher expense ratio than the Vanguard ETF. This is something you should be aware of when you own ETFs. These fees are generally lower than what you'd have to pay for a mutual fund, but they can add up over time if you're not careful.
For perspective, if you invested $500 monthly into two ETFs that averaged 10% annual returns, here's how investments would stack up after 25 years based on their expense ratios:
| ETF | Expense Ratio | Amount Paid in Fees | Value After 25 Years |
|---|---|---|---|
| Vanguard S&P 500 ETF (VOO) | 0.03% | $2,600 | $587,400 |
| SPDR S&P 500 ETF Trust (SPY) | 0.0945% | $7,900 | $582,100 |
Data source: Author calculations. Values rounded down to the nearest hundred.
The Vanguard S&P 500 ETF is an ideal blend that you can't go wrong with for your retirement portfolio.
2. iShares Core MSCI Total International Stock ETF
Part of having a well-rounded portfolio is investing in companies across different regions. Some of the greatest companies in the world don't trade on the New York Stock Exchange or the Nasdaq, which can make them seem inaccessible. But an ETF is an easy way to get access to them.
The iShares Core MSCI Total International Stock ETF (NASDAQ:IXUS) contains over 4,700 companies from both developed and emerging markets. Investing in international companies can take extra thought because you must consider factors like local politics and economy, currency conversions, and regulations. Instead of spending time analyzing all of this, investors can go with the iShares Core MSCI Total International Stock ETF and get exposure to the broader international markets.
3. Vanguard Russell 2000 ETF
The Russell 2000 is the benchmark index for small-cap stocks, similar to the S&P 500 for large-cap stocks.
Small-cap stocks -- that is, stocks between $300 million and $2 billion in market cap -- can present a good risk-reward trade-off for investors in two ways. First, they're too small for many institutional investors to buy, which means they're more likely to fly under the radar. Second, a small company with a huge opportunity can offer lots of room for growth. To be sure, some companies are small because they serve smaller markets, and not all of them will become the next Nvidia -- but Nvidia was a small-cap stock almost 20 years ago before it went on to join the $1 trillion market cap club.
Since Russell 2000 ETFs mirror the same index, there isn't much difference between them, but the Vanguard Russell 2000 (NASDAQ:VTWO) is a good option because of its low cost (0.10% expense ratio).
4. Vanguard Mid-Cap ETF
The Vanguard Mid-Cap ETF (NYSEMKT:VO) can be the happy medium between small-cap and large-cap stocks. With a market cap between $2 billion and $10 billion, mid-cap companies are still relatively small in terms of huge corporations, but they're far from your mom-and-pop businesses.
Mid-cap companies are small enough to present investors with good growth opportunities, but big enough to have the resources to weather many of the economic storms that may come their way. This makes them more stable than smaller companies.
The Vanguard Mid-Cap ETF contains just over 330 companies, so it's not as broad as the other ETFs on this list, but it still contains companies from all major sectors.
ETFs can help you diversify your retirement portfolio
When you're saving for retirement, the risk of picking individual stocks can seem less like the inevitable cost of long-term returns and more like an unwanted burden. Giving yourself exposure to the widest possible swath of the stock market can help you capture meaningful gains with the diversification of a well-rounded portfolio. Even ETF investors should be prepared to ride out the volatility that comes with long-term investing -- but a well-balanced portfolio should help.
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Stefon Walters has positions in Vanguard Index Funds-Vanguard Mid-Cap ETF and Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Vanguard Index Funds-Vanguard Mid-Cap ETF and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
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