Exchange-traded funds, or ETFs for short, have exploded in the three decades since they were first introduced, but do they belong in your retirement portfolio?
Retirement Tip of the Week: Get familiar with ETFs, which are often cost-effective and more easily tradable than other investments in a portfolio. They may already be in your retirement accounts.
The SPDR S&P 500 ETF
the first exchange-traded fund, was introduced in January 1993 and has since become an extremely popular investment choice. The SPDR S&P 500 ETF had $6.5 million in assets at its birth, according to State Street Global Advisors. It now has almost $357 billion.
There are more than 3,000 ETFs with almost $6 trillion in assets in the United States, according to the New York Stock Exchange. The average daily value of ETF transactions is $149 billion across 2.3 billion daily trades.
Hand-picking investments for retirement portfolios isn’t for everyone. In order to do so, investors should research the choices available in their plans, and understand the best mix of stocks, bonds and other investment options that suit their needs and goals. For example, a younger investor just starting her career may prefer a portfolio primarily in equities, while that same person may want to slowly shift toward conservative assets as she gets older and closer to retirement.
That’s why target-date funds are a useful tool for retirement savers. These funds are tied to an estimated retirement year, and automatically change asset allocation to become conservative over time. Target-date funds may be too generic for some investors, but can work well for an investor still learning.
See: Is it better to buy individual stocks or invest in an ETF in a volatile stock market? Experts weigh in.
But for those who want to be more active in their retirement investments, ETFs could make sense. They are easily accessible and often come with lower fees. They do trade throughout the day, unlike a mutual fund which trades at closing, but they’re similar in that they’re “funds of funds.” There are thousands of options, including funds that are linked to indexes, beliefs (such as religions, antigun policies or ESG), and bonds.
ETFs can be a novice-friendly investment choice – and they may even be target-date funds.
There are five key factors to consider, said Christopher Lyman, a certified financial planner at Allied Financial Advisors: Performance, and how it compares to other investments in the same investment sector; process, which is the fund’s investment strategy; people, specifically the ones managing the fund; price, and how it compares to other choices in the same category; and portfolio, which would be the companies within that fund.
Check out MarketWatch’s ETF Wrap, which highlights news about ETFs every week