Three Must-Have ETFs to Anchor Your Retirement Portfolio

Building a retirement portfolio that can sustain you throughout your senior years can be challenging because you need the right balance between growth and security. You also don’t want to constantly monitor your portfolio, as you’ll be too busy enjoying life. After all, isn’t that what you worked so hard for all these years?

In order to keep the money from your investments flowing in while simultaneously providing portfolio stability, you need to have some key holdings that can serve as anchors for your other investments. With this in mind, three Motley Fool contributors recommend the Invesco S&P 500 Equal Weight ETF (NYSEMKT: RSP), the Vanguard Total Bond Market Index (NASDAQ: BND), and the SPDR S&P Dividend ETF (NYSEMKT: SDY) as core investments for your retirement portfolio.

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Chuck Saletta (Invesco S&P 500 Equal Weight ETF): Index-based investing has long provided ordinary investors with the opportunity to outperform funds run by Wall Street’s best and brightest. With one-stop diversification plus results that generally beat the pros, indexing has become a great way to make money over time with very little effort needed.

While that trend has continued in recent years, the current state of the market has exposed what could be a potential flaw in traditional indexing. That flaw is this: Most index funds are market-capitalization weighted, so the largest companies in the index have a disproportionately large impact on the fund.

For example, the SPDR S&P 500 Index ETF tracks the S&P 500, an index with about 500 different companies in it. In that fund, the top 10 holdings make up over 27% of the fund’s value, despite representing a mere 2% of the number of companies in the fund’s universe.

That’s fine and dandy if those companies are growing, but the challenge is that the bigger a company gets, the harder it is for that company to outgrow the market. That’s because every percentage point of growth requires that many more dollars — and past a certain point, those incremental dollars get harder to generate sustainably. It also raises the stakes if one of those behemoths happens to stumble, as that company-specific pain would also affect the index fund more.

To address that potential flaw, the Invesco S&P 500 Equal Weight ETF spreads its investments approximately equally across all of the companies in the S&P 500 index. As a result, its top 10 holdings represent only around 2.5% of the fund’s value. That’s better diversification and less money tied up in the absolute largest companies in the index.

As befitting a good index-based investment, the Invesco S&P 500 Equal Weight ETF has a reasonably low 0.2% expense ratio and low churn of its holdings. That helps it pass on more of the returns of the companies it owns to its shareholders.

That combination of factors makes the Invesco S&P 500 Equal Weight EFT worthy of consideration for a must-have ETF to anchor your retirement portfolio.

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Barbara Eisner Bayer (Vanguard Total Bond Market ETF): If you’ve spent your working years funneling your retirement savings into stocks, like I have, you might not be familiar with the nuances of investing in bonds. But they’re a necessary component of principal preservation once you stop working and start living off your savings.

But where to begin? There are Treasury bonds, municipal bonds, corporate bonds, and savings bonds. What’s a stockhead to do? The answer, of course, is to buy the Vanguard Total Bond Market ETF, which provides exposure to numerous bonds and can serve as the anchor for the bond portion of your retirement portfolio.

According to Vanguard, when you buy this fund, you’ll get “broad exposure to the taxable investment-grade U.S. dollar-denominated bond market, excluding inflation-protected and tax-exempt bonds.” In other words, you’ll have very safe and relatively risk-free exposure to the bond market as a whole.

The fund holds total net assets worth $317 billion and owns 10,099 bonds with an average duration of 6.8 years, so there’s very little turnover. And with its variety of bonds — 65% in U.S. government bonds, 19.2% in A-level bonds, and 15.8% in B-level bonds — you’re looking at a pretty safe investment. With an extremely low expense ratio of 0.035%, this Vanguard fund won’t cost you an arm and a leg to own.

Don’t expect stock market style returns, however. Remember: Bonds are there to provide stability and preservation of principal, not mouth-watering growth. The three-year average return for this ETF is 5.41%, which is quite a bit higher than you’d normally expect. Since its inception in 2007, the fund has provided investors with an average annual return of 4.16%, which isn’t too shabby considering the security it provides.

All retirement portfolios need stability, and bonds are where that treasure can be found. The Vanguard Total Bond Market ETF is the perfect place to put your money to anchor a secure and worry-free retirement.

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An aristocrat among ETFs

Eric Volkman (SPDR S&P Dividend ETF): One solid strategy for retirees (or those nearing retirement) is to invest in reliable companies that pay regular dividends. After all, in our post-work years, there’s nothing better than receiving a constant stream of income from our investments.

So I’d be looking for an ETF that concentrates on such companies. One that stands out to me is the SPDR S&P Dividend ETF, which tracks the S&P High Yield Dividend Aristocrats index. As the name of the index suggests, its components are companies that have boosted their shareholder payouts at least once annually for a minimum of 20 years. That’s five years shorter than the widely held standard for a quarter-century streak, but that’s how this fund bestows the title.

The ETF’s official website nails the appeal of such titles: “Due to the index screen for 20 years of consecutively raising dividends, stocks included in the Index have both capital growth and dividend income characteristics, as opposed to stocks that are pure yield.”

There are some real performers in the ETF’s portfolio. For example the top holding, ExxonMobil, has seen its total return (share price change plus dividends) rise by over 43% so far this year.

Another appealing feature of the SPDR S&P Dividend ETF is its diversity. The portfolio covers many economic sectors including tech, pharmaceuticals, financials, and consumer goods.

This ETF likes its high-yield stocks. ExxonMobil certainly falls into this category, with a nearly 6.3% yield. AT&T also has a high-yield dividend, at 7.6%, as does the lesser-known South Jersey Industries (a natural gas utility), with 5.2%.

Since the SPDR S&P Dividend ETF aims to spread risk by owning a big basket of stocks (112 in total), many of its holdings do have significantly lower yields. So overall, the yield of the ETF itself doesn’t approach those of its star holdings. Still, at nearly 2.7%, it’s more than double the 1.3% of that king of all stock indexes, the S&P 500.

And let’s not forget: It’s a collection of some of the most dependable payers (and raisers) money can buy.

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Barbara Eisner Bayer owns shares of AT&T. Chuck Saletta owns shares of ExxonMobil. Eric Volkman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Vanguard Total Bond Market ETF. The Motley Fool has a disclosure policy.

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