Exchange-traded funds, or ETFs, are a good way to build a retirement portfolio. They are low-cost, provide plenty of diversification because they track specific indexes and they provide certain tax benefits. Folks looking to retire early, or at least with a solid portfolio, can use ETFs as one of their building blocks.
You'll need to start saving early in order to have enough funds to accommodate your desired lifestyle after retirement, and the earlier the better. Since stocks drive a portfolio and bonds provide security, when you begin building your retirement portfolio it should consist primarily of stocks, and later on, as you are approaching retirement it should include bonds.
When to Buy an ETF
Determining the time to buy is really based on your current and future needs. Don't try to time the market. Many so-called experts have tried to time the market and failed at it. Put ETFs that have the highest growth potential into a Roth IRA as you won't need to pay income taxes on the earnings or principal, since the money you are using to invest has already been taxed.
A good way to start is to look for an ETF that could reap good returns through diversification and growth ETFs are just what you need. The growth ETFs tend to track growth indices that typically are sub-sets of broader market indices and invest in companies that exhibit high growth potential. The Vanguard S&P 500 Growth ETF (VOOG) tracks the S&P 500 Growth Index that consists of less than 500 companies that make the broader index. Another example is the iShares Russell 1000 Growth ETF (IWF), where the underlying index Russell 100 Growth index comprises only 70% of the stocks included in the wider Russell 100 index. If you are starting early and considering taking some risk, the SPDR S&P 600 Small Cap Growth ETF (SLYG) could be a good option. This fund selects stocks from within the S&P 600 small cap index universe ans low expense at 0.15%.
Broader index ETFs are also a great way to add diversification to build up your retirement kitty. A fund like SPDR S&P 500 ETF (SPY) mirror the underlying index but tends to provide consistent yet substantial returns over the long run.
High Dividend ETFs
Some high-dividend ETFs include the PowerShares High Yield Equity Dividend Achievers Portfolio (PEY) and the SPDR Dividend (SDY). The PEY mimics an equity index called the Nasdaq US Dividend Achievers 50 Index. This index consists of 50 stocks that are selected primarily on the basis of dividend yield and demonstrate consistent dividend growth for at least 10 years. The SDY replicates, before expenses, the price and yield of the S&P High Yield Dividend Aristocrats Index. This index is designed to measure the performance of the highest dividend yielding S&P Composite 1500 Index constituents that have followed a managed dividends policy of consistently increasing dividends every year for at least 20 years. Stocks included in the index have both capital growth and dividend income characteristics.
Fixed Income ETFs
If you need bond ETFs to add some fixed income to your portfolio, look into iShares Lehman Aggregate Bond Fund (AGG) and iShares Lehman 7-10 Year Treasury Bond Fund (IEF). The IEF mimics the ICE US Treasury 7-10 Year Bond Index which measures the performance of public obligations of the U.S. Treasury that have a remaining maturity of between seven and ten years. These funds may not give spectacular returns but are a viable option for providing stability to a portfolio.
If you are looking to diversify with real estate, look into Real Estate Investment Trusts (REIT) such as the Vanguard REIT ETF (VNQ). For example, the VNQ fund tracks the performance of the MSCI US REIT Index which is comprised of stocks of publicly traded equity REITs. Other popular ETFs include iShares Dow Jones U.S. Real Estate Index Fund (IYR) and SPDR Dow Jones REIT ETF (RWR). You could also consider other large cap, mid or small cap and even international REIT ETFs to add diversification to your portfolio.
The Bottom Line
There are many ETFs you could invest in; the key is to determine your timeline until you'll need to access your funds. This timeline is what determines which type of ETF you should buy. When looking to build a retirement portfolio, research growth investments which not only include stocks but also real estate and commodities. Also look into security investments. These include fixed annuities, government bonds, corporate bonds and market-neutral mutual funds. Whatever you decide on, make sure you start as early as possible. Save as much as you can and invest wisely by doing thorough research, not by following emotion or public opinion.