3 ETFs that can boost your retirement savings
Retirement is getting more and more expensive, with the average American estimating it will cost nearly $2 million to retire comfortably, according to a survey by Charles Schwab. That means it’s especially important to make sure you’re putting your money in the right investments that can help you build your long-term wealth while reducing risk.
exchange traded funds (ETFs) are a smart investment because they hold hundreds or even thousands of different stocks, limiting your risk. But when there is a virtually limitless choice of ETF options, it can be difficult to decide which will give you the most bang for your buck. These three types of ETFs are ways to help you grow your savings while limiting risk.
1. S&P 500 ETFs
An S&P 500 ETF is a fund that includes all stocks in the S&P500and it’s a smart choice for investors who want to see consistent long-term growth while limiting risk.
The S&P 500 has posted a historical average annual return of around 10% since the index’s inception nearly a century ago, so it has a proven track record of positive returns over time.
Because an S&P 500 ETF simply tracks the S&P 500, this type of ETF is also likely to see positive long-term returns – which is exactly what you want when saving for retirement.
Additionally, the companies included in the S&P 500 are among the largest organizations in the United States. This means they are more likely to survive tough economic times than smaller, less stable companies, leading to less volatility. Of course, that doesn’t mean you’ll never see your investments suffer during market declines, but your ETF has a good chance of recovering over the long term, as the chart above shows.
The best S&P 500 ETFs to buy: You have many options for S&P 500 ETFs. One choice is Vanguard S&P 500 ETF (NYSEMKT: VOO), which is one of the cheapest funds with an expense ratio of just 0.03%. Another solid option is SPDR S&P 500 ETF Trust (NYSEMKT: SPY). It does, however, have triple the expense ratio at 0.09%, but it is a more liquid investment than other ETFs, which means it is generally less risky.
2. Total exchange ETFs
Total stock market ETFs are similar to S&P 500 ETFs, except they are even broader. While S&P 500 ETFs only contain stocks of large companies, total stock market ETFs also include small and medium-sized companies.
As their name suggests, total stock market ETFs are strong representations of the stock market as a whole. Given that the stock market has always managed to recover from every crash it has faced, this means that all stock ETFs are equally likely to recover from even the worst market downturns. This is a major benefit when saving for retirement. Although your investments may experience short-term ups and downs, there is a good chance that they will eventually recover.
S&P 500 ETFs and total stock market ETFs are among the safest types of investments because they simply follow the market. Although these funds may falter in a stock market crash, they will inevitably rebound if given enough time. If you’re the risk-averse type and want to make sure your retirement savings are as protected as possible, these types of funds may be right for you.
Best ETFs to buy: the iShares Core S&P Total US Stock Market ETF (NYSEMKT:ITOT) and Schwab US Broad Market ETF (NYSEMKT: SCHB) both boast low expense ratios of 0.03% as well as high liquidity, making them affordable and low-risk options.
3. Growth ETFs
Growth ETFs contain stocks whose sales and/or earnings are expected to increase rapidly. The main advantage of growth ETFs is that they should ideally outperform the market as a whole. In other words, you could see higher returns than if you had invested in stocks of more established companies. However, the downside is that they tend to be more volatile than S&P 500 ETFs or total stock market ETFs.
If we look at the performance over 5 years of the Vanguard Growth ETF (NYSEMKT: VUG) Compared to the Vanguard S&P 500 ETF, the growth ETF has outperformed the S&P 500 ETF in recent months, but is more volatile overall, even underperforming the S&P 500 ETF throughout 2016 and early 2017.
Growth ETFs are a good choice for investors who can bear higher levels of risk in exchange for the possibility of higher returns. If you still have plenty of time before retirement and are okay with the potential volatility, growth ETFs can be a smart option. But if you’re just a few years away from retirement or just not comfortable with riskier investments, you might be better off with a more conservative ETF.
The best growth ETFs to buy: Despite its periods of volatility, the Vanguard Growth ETF has a history of outperforming the market. It also has an expense ratio of just 0.04%, making it an affordable option for many investors. the iShares Russell 1000 Growth ETF (NYSEMKT: IWF) is another solid choice, although it has a slightly higher expense ratio of 0.19%. It has an average 10-year total return of just over 17% per year.
ETFs can be a fantastic investment option when saving for retirement, but it’s important to choose the right fund based on your risk tolerance and preferences. By choosing an ETF that can grow your savings while reducing your risk, it will be easier for you to build a healthy retirement nest egg.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.