3 ETFs That Are All You Need for Retirement

There are literally thousands of exchange-traded funds (ETFs) available to investors covering broad swaths of the market and just about every sector, industry, investment style, and category within it.

ETFs truly simplify the process of putting together a broadly diversified portfolio with just a few different ETFs. Here are three ETFs that give you all the diversification and growth you need for retirement.

1. Vanguard Total Stock Market ETF

The Vanguard Total Stock Market ETF (NYSEMKT: VTI) gives you pretty much all the diversification you need in one investment because this fund tracks the entire investable universe of stocks traded on the New York Stock Exchange and Nasdaq. It has more than 4,000 holdings, from the biggest mega caps to the smallest micro caps. But because it is market-cap weighted, large caps make up the bulk of the portfolio.

The three largest holdings are Apple, Microsoft, and Amazon — with the top 10 holdings making up about 24% of the portfolio.

Over the past five- and 10-year periods through July 31, it has an average annual return of 12.1% and 13.4%, respectively. Year to date, it is down about 17% as of Aug. 31. This ETF trails the S&P 500 slightly year to date and over the past five and 10 years, but it beats the S&P 500 over the past 20-year period with an 8% average annual return as of Aug. 31. This better 20-year performance record is why I favor it over an S&P 500 index fund as a core investment. It also has a next-to-nothing 0.03% expense ratio.

2. Invesco QQQ ETF

With the Vanguard Total Stock Market ETF as the core holding to anchor a portfolio, the Invesco QQQ (NASDAQ: QQQ) fits nicely alongside it to generate long-term growth. This is one of the largest and most popular ETFs in the world, which stems from its excellent performance over the years.

Unlike the broadly diversified Vanguard Total Stock Market ETF, the Invesco QQQ is focused on the Nasdaq 100, which includes the 100 largest non-financial companies on the Nasdaq Stock Exchange. So roughly half of the stocks are from the information technology (IT) sector and about two-thirds are from IT and communication services. Apple, Microsoft, and Amazon are the top three holdings, but they represent much more of the portfolio than in the Vanguard ETF, as the top 10 holdings account for 52% of the portfolio.

This fund has been around since 1999 and has a stellar performance record. Over the past five- and 10-year periods through June 30, it has an average annual return of 16.1% and 17%, respectively. Year to date as of Aug 31, it is down about 24%. But over the past 20 years, through Aug. 31, it has an average annual return of 13.7%.

VTI data by YCharts.

3. Invesco S&P Ultra Dividend Revenue ETF

These two previously mentioned ETFs give you diversification and growth, but they are both large-cap ETFs that will perform well in bull markets and track with the major indexes when the market is down. A third option for a diversified long-term portfolio is the Invesco S&P Ultra Dividend Revenue ETF (NYSEMKT: RDIV).

This ETF tracks the S&P 900 Dividend Revenue-Weighted Index, which takes the 5% of stocks from the S&P 900 with the highest dividend yields, and then from that 5%, includes the top 5% in each sector with the lowest dividend payout ratio.

From those two screens, it arrives at the 60 stocks with the highest yields and lowest payout ratios. This seeks to create a portfolio that consists of great dividends that are sustainable. But it also captures stocks of companies that are highly liquid and well capitalized, even in the worst markets.

About three-quarters of the portfolio are large- and mid-cap value names, so it offers a nice balance with the growth-oriented QQQ.

Lastly, the holdings are weighted by revenue earned so that the companies that are growing the fastest at any given time have the highest weighting. Currently, the top three holdings are Cardinal Health, Valero Energy, and Chevron.

This ETF has a 3.31% 12-month distribution rate, which is the average yield over the previous 12 months. But beyond high dividend payouts, it has solid total returns. As of July 31, it has a one-year return of 9.5% and a five-year annualized return of 9%. Since its inception in September 2013, it has averaged a 10.6% annual return. Year to date as of Aug. 31, it is basically flat with a 0% return but had been up 2.3% at the end of July.

These three ETFs should provide the type of growth, diversification, and balance you need to reach your retirement goals.

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John Mackey, CEO of Whole Foods Market, an Amazon 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 has positions in and recommends Amazon, Apple, Microsoft, and Vanguard Total Stock Market ETF. 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.

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