I've been focusing on index funds in my retirement account, and here are three I've been buying this year.
I'm a big believer in the idea that investors with the time, knowledge, and desire to do so can beat the market over time with a portfolio of individual stocks. However, when I've added money to my retirement accounts recently, most of it has been used to buy shares of high-quality, low-cost index fund ETFs.
There are a few reasons I'm focusing more on index funds than individual stock investing in my retirement account this year.
- I've spent most of my 12 years covering the stock market building a portfolio of individual stocks that could be excellent retirement investments. Just to name a few, top holdings in my retirement account include Berkshire Hathaway (BRK.B 0.93%), Realty Income (O -0.11%), and Walt Disney (DIS -0.12%).
- There is nothing wrong with using ETFs to establish a "core" for a portfolio of individual stocks, and my portfolio's core isn't quite where it should be.
- I'm getting older. While I'm in my early 40s and still a couple of decades away from retirement, my risk tolerance is significantly lower than when I was 22 and opening my first brokerage account.
- There are some excellent opportunities for investing in entire indices because of short-term headwinds like higher interest rates. More on that in a bit.
I won't keep you in suspense. Here are the three ETFs I've been buying in 2024 when I deposit money into my retirement account.
Vanguard S&P 500 ETF
While the S&P 500 isn't particularly cheap right now at about 3% below its all-time high, a basic is still a great long-term addition to any retirement portfolio. The Vanguard S&P 500 ETF (VOO 0.15%) is one of the cheapest index funds in the market, with a 0.03% expense ratio, which means just $3 will go toward fees annually for every $10,000 in assets.
I'm adding this ETF not because I think it will outperform over the next year or two, but because I'm extremely confident that by the time I'm ready to retire my investment will be worth significantly more than I paid for it. After all, simply matching the market's performance over time isn't such a bad thing.
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Vanguard Small-Cap Value ETF
Two of my favorite opportunities in the stock market right now are small-cap stocks and value stocks, as both have significantly underperformed the S&P 500 recently and could be big winners as interest rates fall. The Vanguard Small-Cap Value ETF (VBR 0.06%) lets me invest in both.
The short version is that small caps haven't traded for such a low price-to-book valuation relative to their large-cap counterparts in 25 years. And while the S&P 500 is close to an all-time high, most of its recent performance has been driven by growth stocks like Nvidia (NVDA -1.99%), not by value stocks. To be clear, I'm buying this ETF to hold for the long haul, but now looks like a fantastic entry point.
Vanguard Real Estate ETF
Last but certainly not least is the Vanguard Real Estate ETF (VNQ -0.01%). Real estate has been one of the worst-performing areas of the stock market over the past couple of years, as real estate investment trusts, or REITs, are highly sensitive to rising interest rates.
Because REITs are built for predictable income, their yields tend to move in the same direction as rates from risk-free investments like Treasury bonds. Since yield and price have an inverse relationship, higher yields tend to pressure REIT prices. In addition, REITs tend to rely on borrowed money to finance their operations, similar to how most people use mortgages to buy properties, and rising rates make borrowing more expensive. As rates normalize, real estate has a high probability of outperforming.
What are the best ETFs for you?
To be perfectly clear, there are plenty of excellent ETFs you could add to your portfolio, and the right choices for you depend on your investment goals and risk tolerance. For example, someone who is a little closer to retirement than me might want to put more of their capital in income-based ETFs. But with that in mind, these are three excellent and low-cost choices that could be great ETFs to buy and hold for decades.
Matt Frankel has positions in Berkshire Hathaway, Realty Income, Vanguard S&P 500 ETF, Vanguard Small-Cap Value ETF, Vanguard Specialized Funds-Vanguard Real Estate ETF, and Walt Disney. The Motley Fool has positions in and recommends Berkshire Hathaway, Nvidia, Realty Income, Vanguard S&P 500 ETF, Vanguard Specialized Funds-Vanguard Real Estate ETF, and Walt Disney. The Motley Fool has a disclosure policy.
FAQs
The Motley Fool has positions in and recommends Berkshire Hathaway, Nvidia, Realty Income, Vanguard S&P 500 ETF, Vanguard Specialized Funds-Vanguard Real Estate ETF, and Walt Disney.
Is 3 ETFs enough? ›
Generally speaking, fewer than 10 ETFs are likely enough to diversify your portfolio, but this will vary depending on your financial goals, ranging from retirement savings to income generation.
Why does Dave Ramsey say not to invest in ETFs? ›
One of the biggest reasons Ramsey cautions investors about ETFs is that they are so easy to move in and out of. Unlike traditional mutual funds, which can only be bought or sold once per day, you can buy or sell an ETF on the open market just like an individual stock at any time the market is open.
Is it bad to invest in too many ETFs? ›
Too much diversification can dilute performance
Since the allocation to the Energy ETF will naturally decrease - and so will its contribution to the total portfolio return.
What are the best performing ETFs over the last 5 years? ›
The Top 5 Best Performing ETFs of the Last 5 Years
- Invesco Semiconductors ETF (PSI) Five-year trailing return as of March 31: 34.07% ...
- iShares U.S. Home Construction ETF (ITB) ...
- iShares Semiconductor ETF (SOXX) ...
- VanEck Semiconductor ETF (SMH) ...
- Grayscale Bitcoin Trust (NYSE:GBTC)
Three-fund lazy portfolios
These usually consist of three equal parts of bonds (total bond market or TIPS), total US market and total international market.
What is the 3 portfolio rule? ›
A three-fund portfolio isn't complex. It just means choosing one representative fund to include in your portfolio from the domestic stock, international stock and bond categories. These funds can all belong to the same family or come from different mutual fund companies.
What are the 4 funds Dave Ramsey recommends? ›
And to go one step further, we recommend dividing your mutual fund investments equally between four types of funds: growth and income, growth, aggressive growth, and international.
Can you retire a millionaire with ETFs alone? ›
Investing in the stock market is one of the most effective ways to generate long-term wealth, and you don't need to be an experienced investor to make a lot of money. In fact, it's possible to retire a millionaire with next to no effort through exchange-traded funds (ETFs).
Why should we avoid ETFs? ›
Market risk
The single biggest risk in ETFs is market risk. Like a mutual fund or a closed-end fund, ETFs are only an investment vehicle—a wrapper for their underlying investment. So if you buy an S&P 500 ETF and the S&P 500 goes down 50%, nothing about how cheap, tax efficient, or transparent an ETF is will help you.
Over the long run, they do compound—those fee differences—and investors have been putting a lot more money into VOO versus SPY. That is the reason why we view VOO slightly better than SPY. And that is just the basic approach, which is the lower the investor can pay, the better the investment is.
How long should you hold an ETF? ›
Holding an ETF for longer than a year may get you a more favorable capital gains tax rate when you sell your investment.
Is qqq better than VOO? ›
Average Return
In the past year, QQQ returned a total of 35.87%, which is significantly higher than VOO's 28.51% return. Over the past 10 years, QQQ has had annualized average returns of 18.69% , compared to 12.90% for VOO. These numbers are adjusted for stock splits and include dividends.
What is the number 1 ETF to buy? ›
Top U.S. market-cap index ETFs
| Fund (ticker) | YTD performance | Expense ratio |
|---|
| Vanguard S&P 500 ETF (VOO) | 7.7 percent | 0.03 percent |
| SPDR S&P 500 ETF Trust (SPY) | 7.6 percent | 0.095 percent |
| iShares Core S&P 500 ETF (IVV) | 7.7 percent | 0.03 percent |
| Invesco QQQ Trust (QQQ) | 5.8 percent | 0.20 percent |
The best-performing ETF in the last 10 years was VanEck Semiconductor ETF (SMH).
What is the riskiest ETF? ›
7 risky leveraged ETFs to watch:
- ProShares UltraPro QQQ (TQQQ)
- ProShares Ultra QQQ (QLD)
- Direxion Daily S&P 500 Bull 3x Shares (SPXL)
- Direxion Daily S&P 500 Bull 2x Shares (SPUU)
- Amplify BlackSwan Growth & Treasury Core ETF (SWAN)
- WisdomTree U.S. Efficient Core Fund (NTSX)
The three-fund portfolio is lazy investing at its best. It's simple, it's proven to have a better long-term track record of gains than picking single stocks and trying to time the market, and it lets you generally "set it and forget it" when it comes to saving for retirement.
How many S&P 500 ETFs should I buy? ›
SPY, VOO and IVV are among the most popular S&P 500 ETFs. These three S&P 500 ETFs are quite similar, but may sometimes diverge in terms of costs or daily returns. Investors generally only need one S&P 500 ETF.
What is the 3% limit on ETFs? ›
Under the Investment Company Act, private investment funds (e.g. hedge funds) are generally prohibited from acquiring more than 3% of an ETF's shares (the 3% Limit).
How much of your money should be in ETFs? ›
You expose your portfolio to much higher risk with sector ETFs, so you should use them sparingly, but investing 5% to 10% of your total portfolio assets may be appropriate. If you want to be highly conservative, don't use these at all. Consider the two funds below.
