When you’re building a nest egg, diversification is essential. You’ve heard the saying: Never put all your eggs in one basket. But it’s surprisingly easy to build a diversified portfolio to fund your retirement without handpicking dozens of investments.
An exchange-traded fund (ETF) is a bundle of securities — often hundreds or more — that trades via major exchanges like a regular stock. Because an ETF invests across so many securities, you get automatic diversification. So, building a secure retirement portfolio can be as simple as investing in these four ETFs.
1. Vanguard S&P 500 ETF (VOO)
A great backbone for your retirement portfolio is the Vanguard S&P 500 ETF (NYSEMKT: VOO). It tracks the S&P 500 index, a collection of 500 of the largest publicly traded corporations in the U.S., representing about 80% of the domestic stock market. Although the index is down nearly 20% thus far in 2022, historically, it’s delivered average annual returns of about 10% for investors. Thanks to compounding, that translates to serious wealth over time.
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You really can’t go wrong with any S&P 500 index fund. But the Vanguard S&P 500 ETF is a good pick because the fees are minuscule. The expense ratio is 0.03%, which means you’d only pay $3 in fees on a $10,000 investment.
2. iShares Core S&P Small-Cap ETF (IJR)
The large-cap stocks in the S&P 500 index are a predictable generator of wealth in the long term, but small-cap stocks have greater growth potential. That’s why the iShares Core S&P Small-Cap ETF (NYSEMKT: IJR) is an excellent addition to your retirement portfolio, particularly if you’re young and have relatively high risk tolerance.
The fund’s benchmark index is the S&P Small-Cap 600 Index, which consists of 600 U.S. stocks with a market capitalization of between $850 million and $3.7 billion. Because the index doesn’t include any S&P 500 companies, the fund works well as a diversifier. Plus, it requires companies to have positive GAAP (generally accepted accounting principles) earnings for both the most recent quarter and the past four quarters, which shields investors from small companies with shaky finances.
The iShares Core S&P Small-Cap ETF is the largest small-cap ETF, with around $60 billion in assets under management. It also has a dirt-cheap expense ratio of 0.06%.
3. Vanguard Real Estate Index Fund ETF (VNQ)
Investing in real estate can provide additional diversification for your nest egg and reduce your portfolio’s volatility. But buying physical property can be a hassle. The Vanguard Real Estate Index Fund (NYSEMKT: VNQ) allows you to become a real estate investor without actually buying property.
The fund invests in 171 real estate investment trusts (REITs), which own, operate, and finance commercial properties. REITs are a good addition to a retirement portfolio because they’re a faithful source of dividends. The reason? REITs are legally required to return 90% of their taxable income to shareholders.
With about $38 billion in assets under management, the Vanguard Real Estate ETF is by far the largest real estate ETF, with an annual yield of 2.46% and a relatively low expense ratio of 0.12%.
4. Vanguard Total Bond Market ETF (BND)
Even if you’re a few decades away from retirement, it’s smart to have a small percentage of your portfolio invested in bonds. While stocks are a much bigger growth driver, bonds offer stability.
The Vanguard Total Bond Market ETF (NASDAQ:BND) is a good option to consider. The ETF tracks the U.S. Bloomberg U.S. Aggregate Float Adjusted Index, which attempts to mirror the performance of taxable investment-grade bonds that pay a fixed interest rate across the entire U.S. bond market. The fund has a 12-month yield of 2.17% and an expense ratio of just 0.03%.
Typically, you want to allocate more of your portfolio to bonds and other fixed-income investments as you get closer to retirement. Bonds may not be the most exciting investment, but they’re a vital safeguard against stock market volatility.
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Robin Hartill, CFP® has positions in Vanguard Real Estate ETF. The Motley Fool has positions in and recommends Vanguard Real Estate ETF, Vanguard S&P 500 ETF, Vanguard Total Bond Market ETF, and iShares S&P SmallCap 600 Index. The Motley Fool has a disclosure policy.
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