Whether it's 40 years away or 10 years away, there's never a bad time to think about investing for retirement. If you haven't thought much about it outside of your employer-sponsored plan, know that you can easily supplement your retirement portfolio with exchange-traded funds, or ETFs.
ETFs are baskets of stocks from an index or customized benchmark that trade like stocks, yet they are diversified with dozens, hundreds, or in some cases thousands of stocks — like a mutual fund. So, even just adding two ETFs to your retirement portfolio could give you adequate diversification.
Let's take a closer look at two winning ETFs that complement each other well.
1. Fidelity MSCI Information Technology ETF
The Fidelity MSCI Information Technology ETF (NYSEMKT: FTEC) is not the biggest or most popular technology ETF, but it is certainly among the very best. This fund, with about $6.7 billion in assets, has been one of the top-performing technology ETFs with a lower expense ratio than its peers.
This ETF tracks the MSCI US IMI Information Technology 25/50 Index, which is the same benchmark that the Vanguard Information Technology ETF tracks. This benchmark is designed to capture the spectrum of technology stocks — including large-, mid- and small-cap names, with certain screens applied to ensure greater diversification. The fund currently holds about 346 stocks with Apple, Microsoft, Nvidia, and Visa as the largest holdings. The 10 largest holdings make up 57% of the portfolio.
Because it tracks more stocks across market cap segments, it is more diversified than other technology ETFs, with 84% in large-caps, 12% in mid-caps, and 4% in small-caps. Nonetheless, it's still focused on one sector — one that is prone to short-term market swings. But over the long term, it has produced great returns.
This fund was established in 2013 and since its inception, it has returned about 24% per year on an annualized basis, with annualized returns of 46.6%, 34.1%, and 30.1% over the last one-, three- and five-year periods ended Oct. 31. To get an even longer-term view of performance, the benchmark has an annualized return of 22.4% for 10 years and 14.9% for 20 years.
As mentioned, this ETF is similar to the very popular Vanguard Information Technology ETF, but it has a slightly lower expense ratio at 0.08% versus 0.10% for the Vanguard fund. But both are among the best choices in its class for their top-tier long-term returns and diversification relative to other technology-focused ETFs.
2. Vanguard Total Stock Market ETF
The Vanguard Total Stock Market ETF (NYSEMKT: VTI) makes for an excellent core holding in any long-term portfolio and complements the more aggressive, sector-focused Fidelity MSCI Information Technology ETF. As the name suggests, this is an ETF that covers the entire spectrum of the U.S. equity market via the CRSP US Total Market Index. The ETF includes over 4,100 stocks, which represent approximately 100% of the investable U.S. stock market, from mega-caps to micro-caps. Few ETFs offer such a broad diversified mix of stocks, and no other ETFs track this particular index.
Its largest holdings are Microsoft, Apple, and Alphabet and the top 10 holdings represent 25% of the fund.
This is one of the most popular ETFs on the market, with about $283 billion in assets. It's popular for its broad diversification, to add ballast to a portfolio, but also because it has delivered strong returns. Since its inception in May 2001, it has returned 9% per year, on an annualized basis. That's through a dot-com bubble, a house market crash, a Great Recession, and a pandemic crash. Over the last 10 years it has generated a 16.1% annualized return through Oct. 31. Over the last one-, three- and five-year period it has returned 43.9%, 21.7%, and 18.9%, respectively. Since 2009, this ETF has posted a positive annual return every year except for 2018 when it fell 5.3%.
Also, what stands out about the Vanguard Total Stock Market ETF is its expense ratio, which is a minuscule 0.03% — which is among the very lowest you can get.
Broad exposure, solid performance
Adding just these two ETFs to your retirement portfolio would provide you with broad exposure to the best performing sector of the stock market over the past decade — technology — as well as diversification across the entire spectrum of the market. Over the long haul, whether that's 10 years, 40 years, or somewhere in between, they would help firm up and diversify any retirement portfolio.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Apple, Microsoft, Nvidia, Vanguard Total Stock Market ETF, and Visa. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.