Saving and investing for retirement doesn't have to be complicated. With just a few index funds, investors can have a well-rounded, diversified portfolio poised to put them in a good position to be financially comfortable by retirement. Here are four exchange-traded funds (ETFs) that can carry you to retirement.
Include an S&P 500 index fund
There's a reason the S&P 500 index, which tracks the 500 largest American companies, is one of the more popular indexes in investing. Consisting of large-cap companies spanning any industry you can imagine, an investment in the S&P 500 is one surefire way to achieve instant diversification within your portfolio. And due to the size of the companies within the S&P 500, they're generally more financially stable than smaller companies.
An S&P 500 exchange-traded fund like the Vanguard S&P 500 Index Fund ETF (NYSEMKT: VOO) is a good choice because of its low expense ratio of 0.03%.
Give yourself a chance for high growth
Unlike large-cap companies, which tend to have more stability, investing in small-cap companies is about the chance for high growth potential. As companies grow and mature, the room for exponential growth becomes limited. So, for investors interested in that type of growth potential, they should look into small-cap companies.
With this potential for high growth comes higher risks. Small companies are more prone to high volatility and much more likely to run into financial trouble than a company worth tens of billions. Because of the risk involved with small-cap stocks, you should consider a small-cap index fund that will spread out your risks. The Vanguard Small-Cap ETF (NYSEMKT: VB) consists of over 1540 companies, ensuring you get diversified holdings.
Include a mid-cap ETF
Mid-cap companies are a good mix of just small enough for good growth potential but also big enough to have a bit more financial resources than some younger companies. You don't get all the risks involved with small-cap companies, but you also don't get the large upside; you don't get the stability of large-cap companies, but you also have more room for growth. It's a happy medium for many people.
The Vanguard Mid-Cap ETF (NYSEMKT: VO) has a cheap expense ratio of 0.04% and consists of 380 mid-cap companies. It is also spread out among many industries. The top five includes the following:
Consumer Discretionary (13.8%)
Health Care (11%)
Don't focus solely on U.S. companies
A well-rounded investment portfolio should generally consist of international companies. You're limiting yourself as an investor if you only look into investing in American companies because there are great companies worldwide that make for solid investments. Instead of researching different regions and thriving companies within those regions, a solid ETF like the Vanguard Total International Stock ETF (NASDAQ: VXUS) can do a lot of the heavy lifting for you.
VXUS consists of 7,896 companies in the following regions:
North America: 8%
Emerging Markets: 25.2%
Middle East: 0.5%
The top 10 holdings in the fund make up 9.2% of all assets and include some familiar household names like Samsung, Toyota, and Nestle. International markets are generally categorized as developed or emerging. The Vanguard Total International Stock ETF gives investors exposure to both market types, and with an 0.07% expense ratio, it's much cheaper than similar funds of its type.
Let your investments grow tax free
In a regular brokerage account, you'll owe capital gains taxes whenever you sell an investment for a profit (how much depends on how long you held the investment). The same goes for retirement accounts like a 401(k) and traditional IRA; you receive your tax breaks up front and have to pay taxes on withdrawals you make in retirement.
A Roth IRA, however, operates differently. You contribute after-tax money into your Roth IRA, and your investments and earnings get to grow and compound tax free. Since you paid your taxes on the front end, you can withdraw your money without worrying about owing taxes on it whenever you're in retirement. Taking advantage of a Roth IRA can easily save you tens of thousands of dollars in taxes in retirement. If you're eligible to contribute to a Roth IRA, you won't regret utilizing it.
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Stefon Walters has positions in Vanguard Mid-Cap ETF, Vanguard S&P 500 ETF, Vanguard Small-Cap ETF, and Vanguard Total International Stock ETF. The Motley Fool has positions in and recommends Vanguard Mid-Cap ETF, Vanguard S&P 500 ETF, Vanguard Small-Cap ETF, and Vanguard Total International Stock ETF. The Motley Fool has a disclosure policy.