7 Low-Overhead ETFs for Your 401(k)
Many 401(k) retirement accounts are heavily weighted with mutual funds, but there are better options. Exchange traded funds (ETFs) have a more transparent fee structure, can be traded in a more granular way, and boast much less overhead. That translates into fewer annual fees to drag down your portfolio's returns.
If you’re an investor who wants to make the most of your 401(k), then you may want to consider investing in ETFs with low expense ratios. These seven are good ones to consider. All figures are current as of Q3 2021.
- If you're unhappy with the fees you're paying to mutual fund managers in your retirement account, you may want to consider switching to ETFs if possible.
- An ETF (exchange traded fund) functions much like an index mutual fund but comes with lower costs and greater liquidity and flexibility.
- Here, we list seven of the best ETFs for a retirement account based on asset class and with low expense ratios.
1. SPDR S&P 500 ETF (SPY)
The Standard and Poor's 500 Index (S&P 500) has long been seen as the bellwether index for the US stock market. S&P 500 index funds have been a favorite retirement holding for decades. SPY just repackages this old standby, with lower expenses and less paperwork than traditional index funds. This ETF is an excellent addition to any 401(k) portfolio, and institutional investors will tell you that S&P 500 index funds should play a role in most retirement accounts.
2. The Vanguard Total Stock Market ETF (VTI)
- Issuer: Vanguard
- Dividend: $2.80
- Expense ratio: 0.03%
Vanguard's Total Stock Market ETF is an alternative to other market index funds. VTI gives investors exposure across the entire Nasdaq and NYSE, with securities from every sector and segment. This ETF has a rock-bottom expense ratio, a massive amount of assets under management, and a good track record with solid returns.
3. The iShares Core U.S. Aggregate Bond ETF (AGG)
- Issuer: BlackRock iShares
- Dividend: $2.18
- Expense ratio: 0.04%
The long-term stability of the bond market makes AGG an excellent choice for young investors who need rock-solid assets in their 401(k). AGG gives investors a stake in the bond market without requiring a set amount of time for maturation. That kind of flexibility, along with steady performance, makes this ETF a good choice for a 401(k), despite the relatively low returns.
4. The iShares MSCI Emerging Markets ETF (EEM)
- Issuer: BlackRock iShares
- Dividend: $0.76
- Expense ratio: 0.70%
Emerging markets can be exciting because they’re volatile, which isn’t always the best trait for a retirement investment. But the iShares MSCI Emerging Markets ETF is a good way to add a controlled amount of volatility to your retirement fund. The key is to be judicious and not overexpose your retirement to emerging markets without anchoring your 401(k) in bonds and index funds.
5. The Vanguard Value ETF (VTV)
- Issuer: Vanguard
- Dividend: $2.95
- Expense ratio: 0.04%
VTV gives investors exposure to a range of large-cap securities, like JP Morgan Chase, Procter & Gamble, Johnson & Johnson, and Berkshire Hathaway. Adding an ETF like Vanguard Value to your 401(k) is a great way to diversify away from index funds while still keeping your risk relatively low.
6. The iShares Russell 2000 ETF (IWM)
- Issuer: iShares
- Dividend: $1.90
- Expense ratio: 0.19%
In a way, the Russell 2000 Index is a counterpart to the S&P 500. Instead of following 500 blue chips, the Russell indexes 2,000 small-cap securities. The iShares Russell 2000 ETF is a great addition to your 401(k) if you believe that most of the growth in the American economy over the next 20 years is going to come from smaller businesses. IWM gives investors a share of the Russell index with a relatively low expense ratio, which makes it uniquely suited for long-term investing.
7. The iShares iBoxx $ High Yield Corporate Bond ETF (HYG)
- Issuer: iShares
- Dividend: $3.89
- Expense ratio: 0.48%
Corporate bonds can be a good alternative to Treasury notes as they offer investors higher returns on secured debt. The iShares iBoxx $ High Yield Corporate Bond ETF focuses on corporations with a BB bond rating, mixing in a few AAA bonds with some that are rated B and lower. Adding HYG to your 401(k) is a good way to mix some corporate notes in with your government bonds.
The 7 Best ETFs for Retirement Investors
Mutual funds almost go hand-in-hand with retirement investing. And why not? The modern mutual fund predates exchange-traded funds (ETFs) by more than six decades. Most 401(k) plans hold nothing but mutual funds. So it’s reasonable to link one with the other.
But don’t sleep on exchange-traded funds. As you’ll soon find out, while many of the best ETFs out there are tactical strategies and great trading vehicles, some of them are dirt-cheap, long-term buy-and-hold dynamos that can give investors what they need in retirement: diversification, protection and income.
Many (though not all) ETFs are simple index funds – they track a rules-based benchmark of stocks, bonds or other investments. It’s an inexpensive strategy because you’re not paying managers to analyze and select stocks. And it works. In 2018, the majority of large-cap funds (64.5%) underperformed Standard & Poor’s 500-stock index – the ninth consecutive year that most of them failed to beat the benchmark.
Today, we’ll look at seven of the best ETFs for retirement. This small group of funds covers several assets: stocks, bonds, preferred stock and real estate. Which ones you buy and how much you allocate to each ETF depend on your individual goal, be they wealth preservation, income generation or growth.
Data is as of Aug. 28. Yields represent the trailing 12-month yield, which is a standard measure for equity funds.
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Vanguard High Dividend Yield ETF
- Type: U.S. dividend stock
- Market value: $24.3 billion
- Dividend yield: 3.2%
- Expenses: 0.06%
The conventional wisdom used to be that you should subtract your age from 100 to determine how much of your portfolio should be allocated to stocks. At age 50, you would be 50% in equities; by age 70, that would have dropped to 30%. Easy peasy.
In recent years, however, that rule has been kicked to the curb, and financial experts increasingly suggest hanging on to more of your stocks later in life. Why? Americans are living longer – a lot longer. Men’s average life expectancy has shot up from 67.1 years in 1970 to 76.1 years as of 2017. For women, it has jumped from 74.7 in 1970 to 81.1 years as of 2017.
And those are just averages. Reaching your 90s and even triple digits is a realistic scenario, which means your retirement funds may need to last decades longer than they once did.
- Vanguard High Dividend Yield ETF (VYM, $85.22) is a conservative way to remain in stocks during retirement. This is a broad collection of more than 400 mostly large-cap stocks that feature higher yields than their peers. Most of the top holdings are well-known for their dividends – Johnson & Johnson (JNJ), Exxon Mobil (XOM) and Procter & Gamble (PG) are among the numerous Dividend Aristocrats in the group.
VYM is a “conservative” stock fund because of its strategy. The Vanguard S&P 500 Index (VOO), for instance, is a blend of both growth and value, getting some of its returns from a modest yield (currently 1.9%) and price appreciation. Vanguard High Dividend Yield is more value- and dividend-oriented, sacrificing potential price growth for more substantial income generation.
Learn more about VYM at the Vanguard provider site.
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iShares MSCI EAFE ETF
- Type: International developed-market stock
- Market value: $57.5 billion
- Dividend yield: 3.1%
- Expenses: 0.31%
It’s vital to diversify your portfolio simply because no investment “works” all the time. Mark Pruitt, investment adviser representative with Strategic Estate Planning Services, wrote earlier this year for Kiplinger about the importance of geographic diversification – owning stocks from other countries – as exemplified by a mid-year 2018 report from Sterling Capital Management LLC:
“The report shows from 1998 to 2017 that 50% of the time the S&P 500 outperformed the international markets and the other 50% of the time the international markets outperformed the S&P 500.”
Enter the iShares MSCI EAFE ETF (EFA, $62.42).
The “EAFE” stands for “Europe, Australasia and Far East” and refers to so-called developed economies in those regions. Developed economies are typically highly industrialized, economically mature and have (relatively) stable governments.
EFA is one of the best ETFs you can hold for this kind of exposure. It’s a basket of more than 900 large-cap stocks from a dozen such countries, including Japan (24.3% of the portfolio), the United Kingdom (16.1%) and France (11.3%).
Many of these are multinational corporations you’ve probably heard of: Swiss foods giant Nestle (NSRGY), Japanese automaker Toyota (TM) and British energy giant BP plc (BP) dot this ETF’s top holdings. And while it’s a blended fund (both growth and value), many of these large-caps yield more than their American counterparts, leading to a much more substantial annual dole than the S&P 500.
Learn more about EFA at the iShares provider site.
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Vanguard Total World Stock ETF
- Type: All-world stock
- Market value: $16.5 billion
- Dividend yield: 2.3%
- Expenses: 0.09%
The Vanguard Total World Stock ETF (VT, $72.64) is one of the best ETFs to buy for the truly spartan investor – someone who wants quite literally a whole world of stock holdings without having to buy four or five funds to get it.
In fact, our Steven Goldberg calls VT “the only stock index fund you’ll ever need.”
Vanguard Total World Stock ETF puts roughly 8,200 stocks at your fingertips from all reaches of the planet. America? Check. Developed markets? Check. It even has a decent allocation of about 10% of its assets in emerging markets – higher-growth though sometimes less sturdy economies such as China and India.
About 56% of the portfolio is invested in U.S. stocks; in fact, only one non-U.S. company (Nestle) makes the top 10 holdings. After that, there are decent-size holdings in countries such as Japan (7.5%), the United Kingdom (5.0%) and China (3.2%), but it has holdings in dozens of other countries, including small allotments to the Philippines (0.2%), Chile (0.1%) and Qatar (0.1%).
VT is a true one-stop shop for equities, it’s extraordinarily cheap for what it provides, and for now, it yields a little more than the broader U.S. market.
Learn more about VT at the Vanguard provider site.
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iShares Cohen & Steers REIT ETF
- Type: Real estate
- Market value: $2.4 billion
- Dividend yield: 2.5%
- Expenses: 0.34%
Real estate investment trusts (REITs) are a slightly different critter than traditional stocks. These are a creation of Congress that came to life in 1960 specifically to give everyday investors access to real estate. It’d be difficult for most people to round up the millions of dollars it would take to buy and lease out, say, an office building or a strip mall. But just about any retail investor can shell out a few hundred bucks for some shares.
REITs are helpful to retirement investors for a pair of reasons. For one, REITs by their very design are obligated to pay out at least 90% of their taxable profits as dividends to shareholders. As a result, real estate tends to be among the top-yielding market sectors, and a great source of income for retirees.
Also, real estate tends to be uncorrelated with U.S. stocks – in other words, they don’t always move the same way, which means REITs sometimes perform well when U.S. stocks don’t. That’s a benefit of diversification. Ben Carlson, over at A Wealth of Common Sense, showed that from 1978 through July 2018, a 75%-25% blend of the S&P 500 and a REIT index outperformed each index individually. “This is not an enormous improvement by any means,” he writes, “but combining the two assets saw higher returns than the REIT index and lower volatility than the S&P.”
The iShares Cohen & Steers REIT ETF (ICF, $118.06) is one of the best ETFs for this purpose – and one that we’ve focused on before when seeking out funds for market crash protection. It blends the expertise of real estate specialist Cohen & Steers with the scale of iShares (which allows it to charge relatively lower fees).
This tight 30-stock portfolio invests in the dominant players in a number of different property types. American Tower (AMT) provides the telecommunications infrastructure that the U.S. and several other countries need to keep our smartphones connected. Welltower (WELL) is a leader in senior housing and assisted living real estate. And Public Storage (PSA) … obviously, the name says it all.
A curious note about ICF is that it yields less than most other REIT ETFs. But its emphasis on high quality delivers superior price performance that makes it a total-return winner over most time periods.
Learn more about ICF at the iShares provider site.
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Vanguard Total Bond Market ETF
- Type: Intermediate-term bond
- Market value: $234.7 billion
- SEC yield: 2.3%*
- Expenses: 0.035%
Bonds – debt issued by numerous entities, from the U.S. government to giant corporations to small municipalities – have a place in many portfolios, especially retirement accounts. That’s largely because they dole out fixed distributions that retirees can rely on as income.
And again, it helps to have another uncorrelated asset. From Kiplinger’s Eleanor Laise:
“For retirees, bond funds should generally act as ballast, helping you withstand market volatility and giving you stable assets to tap when your stock holdings are down.”
Why bond funds, instead of individual bonds? Well, for one, they’re more difficult to research than many stocks, and the media barely covers them, so it’s not easy to know which individual debt issues to purchase. A bond fund takes that responsibility off your plate, and you get the added bonus of defraying risk by spreading it across hundreds if not thousands of bonds.
The Vanguard Total Bond Market ETF (BND, $85.16) is a bargain-basement ETF that holds more than 8,600 bonds. It’s considered an “intermediate-term” bond fund with an average duration of six years. (Duration is a risk measure for bonds; it essentially means that a one-percentage-point increase in interest rates will result in a 6% decline for the fund.)
BND invests across numerous types of debt – Treasuries (44.0%), corporate (26.8%) and government mortgage-backed securities (21.8%) make up the lion’s share, though it has sprinklings of corporate mortgage-backed and even foreign bonds. And all the debt it holds is “investment-grade,” which means the major credit agencies perceive all of these to have a high likelihood of being repaid.
Also, thanks to an expense drop this year, BND is now the lowest-cost U.S. bond ETF on the market.
*SEC yield reflects the interest earned after deducting fund expenses for the most recent 30-day period and is a standard measure for bond and preferred-stock funds.
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SPDR Bloomberg Barclays 1-3 Month T-Bill ETF
- Type: Ultra-short-term bond
- Market value: $9.1 billion
- SEC yield: 1.9%
- Expenses: 0.1359%
Money market funds are primarily designed to protect your assets and earn you a tiny bit on the side. These funds invest in high-quality, short-term debt such as Treasury notes and certificates of deposit. They don’t yield much, but they’re low on risk, making them an ideal hidey hole during turbulent markets.
There are only a handful of money market ETFs, but the SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL, $91.58) is a solid and inexpensive choice among the higher-asset options.
You won’t find many smaller ETF portfolios out there. BIL holds just 15 extremely short-term Treasury debt issues ranging from 1 to 3 months at the moment, with an average adjusted duration of just 29 days.
How stable is this fund? Over the past decade, the gap from its highest point to its lowest point is a mere three-tenths of a percent. All it takes is a quick look at the chart to see the evident upsides and downsides of a fund like this.
BIL data by YCharts
You’ll miss out on any bullishness in the market, but your money will barely budge, no matter how dramatic the downturn.
Learn more about BIL at the SPDR provider site.
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VanEck Vectors Preferred Securities ex Financials ETF
- Type: Preferred stock
- Market value: $675.7 million
- SEC yield: 5.4%
- Expenses: 0.41%
Preferred stocks have long been called a “hybrid” security that blends various aspects of common stocks and bonds. For instance, preferred stock does actually represent ownership in a company, like a common stock … but it usually doesn’t have voting rights, which bondholders lack too. Preferred stocks pay out (typically high) dividends that are often taxed as “qualified” dividends like many common-stock payouts … but these dividends often are fixed at a specific rate, much like a bond’s coupon.
From a practical standpoint, preferred stocks are an income play. They offer well-above-average yields often between 5% and 7%. But they typically don’t move much in either direction – if a company reports explosive earnings, its common stock might shoot higher, but its preferreds might barely budge.
This conservative, income-focused nature makes preferred stocks appealing to retirement portfolio. The VanEck Vectors Preferred Securities ex Financials ETF (PFXF, $20.13) is one of the best ETFs to buy to collect this kind of income.
Following the 2007-09 bear market and financial crisis, numerous “ex-financials” ETFs popped up in response to the beating banks took and the subsequent distrust that generated. PFXF, introduced in 2012, was one of them. Whereas most preferred-stock funds have large allocations to financial-sector preferreds, VanEck’s ETF eschews those, instead investing in preferred securities from utilities, REITs and telecoms, among other areas of the market.
Honestly? PFXF’s ex-financial nature isn’t really here nor there anymore. Banks are far better capitalized and regulated now than they were in 2007, so the risk of another near-collapse doesn’t seem as dire. But the reason PFXF’s 120-stock portfolio still holds up is its combination of higher-than-average yield and one of the lowest expenses in the space.
* Includes a four-basis-point fee waiver.
Learn more about PFXF at the VanEck provider site.
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Best ETFs to buy in 2021
Exchange-traded funds (ETFs) allow investors to buy a collection of stocks or other assets in just one fund with (usually) low expenses, and they trade on an exchange like stocks. ETFs have become tremendously popular in the last decade and now hold trillions of dollars in assets. With literally thousands of ETFs to choose from, where does an investor start? And with the stock market rising furiously after an initial plunge as part of the coronavirus crisis, what are the best ETFs to buy? Below are some of the top ETFs by category, including some highly specialized funds.
Best ETFs for 2021
How to choose the right type of ETF for you
Real estate ETFs
Top Equity ETFs
Equity ETFs provide exposure to a portfolio of publicly traded stocks, and may be divided into several categories by where the stock is listed, the size of the company, whether it pays a dividend or what sector it’s in. So investors can find the kind of stock funds they want exposure to and buy only stocks that meet certain criteria.
Stock ETFs tend to be more volatile than other kinds of investments such as CDs or bonds, but they’re suitable for long-term investors looking to build wealth. Some of the most popular equity ETF sectors and their returns (as of July 26) include:
Top U.S. market-cap index ETFs
Vanguard S&P 500 ETF(VOO)
This kind of ETF gives investors broad exposure to publicly traded companies listed on American exchanges using a passive investment approach that tracks a major index such as the S&P 500 or Nasdaq 100.
Vanguard S&P 500 ETF Performance:
- 2020 performance: 18.3 percent
- Historical performance (annual over 5 years): 17.6 percent
- Expense ratio: 0.03 percent
Some of the most widely held ETFs in this group also include SPDR S&P 500 ETF Trust (SPY), iShares Core S&P 500 ETF (IVV) and Invesco QQQ Trust (QQQ).
Top International ETFs
Vanguard FTSE Developed Markets ETF (VEA)
This kind of ETF can provide targeted exposure to international publicly traded companies broadly or by more specific geographic area, such as Asia, Europe or emerging markets. Investing in foreign companies introduces concerns such as currency risk and governance risks, since foreign countries may not offer the same protections for investors as the U.S. does.
Vanguard FTSE Developed Markets ETF Performance:
- 2020 performance: 9.7 percent
- Historical performance (annual over 5 years): 10.9 percent
- Expense ratio: 0.05 percent
Some of the most widely held ETFs also include iShares Core MSCI EAFE ETF (IEFA), Vanguard FTSE Emerging Markets ETF (VWO) and Vanguard Total International Stock ETF (VXUS).
Top Sector ETFs
Vanguard Information Technology ETF (VGT)
This kind of ETF gives investors a way to buy stock in specific industries, such as consumer staples, energy, financials, healthcare, technology and more. These ETFs are typically passive, meaning they track a specific preset index of stocks and simply mechanically follow the index.
Vanguard Information Technology ETF Performance:
- 2020 performance: 46.0 percent
- Historical performance (annual over 5 years): 31.5 percent
- Expense ratio: 0.10 percent
Some of the most widely held ETFs also include Financial Select Sector SPDR Fund (XLF), Energy Select Sector SPDR Fund (XLE) and Industrial Select Sector SPDR Fund (XLI).
Vanguard Dividend Appreciation ETF (VIG)
This kind of ETF gives investors a way to buy only stocks that pay a dividend. A dividend ETF is usually passively managed, meaning it mechanically tracks an index of dividend-paying firms. This kind of ETF is usually more stable than a total market ETF, and it may be attractive to those looking for investments that produce income, such as retirees.
The best dividend ETFs tends to offer higher returns and low cost.
Vanguard Dividend Appreciation ETF Performance:
- 2020 performance: 15.4 percent
- Historical performance (annual over 5 years): 15.4 percent
- Expense ratio: 0.06 percent
Some of the most widely held ETFs here also include) Vanguard High Dividend Yield Index ETF (VYM) and Schwab U.S. Dividend Equity ETF (SCHD).
Top bond ETFs
A bond ETF provides exposure to a portfolio of bonds, which are often divided into sub-sectors depending on bond type, their issuer, maturity and other factors, allowing investors to buy exactly the kind of bonds they want. Bonds pay out interest on a schedule, and the ETF passes this income on to holders.
Bond ETFs can be an attractive holding for those needing the safety of regular income, such as retirees. Some of the most popular bond ETF sectors and their returns (as of July 26) include:
Long-term bond ETFs
iShares MBS ETF (MBB)
This kind of bond ETF gives exposure to bonds with a long maturity, perhaps as long as 30 years out. Long-term bond ETFs are most exposed to changes in interest rates, so if rates move higher or lower, these ETFs will move inversely to the direction of rates. While these ETFs may pay a higher yield than shorter-term bond ETFs, many don’t see the reward as worthy of the risk.
iShares MBS ETF Performance:
- 2020 performance: 4.1 percent
- Historical performance (annual over 5 years): 2.2 percent
- Expense ratio: 0.06 percent
Some of the most widely held ETFs also include iShares 20+ Year Treasury Bond ETF (TLT) and Vanguard Mortgage-Backed Securities ETF (VMBS).
Short-term bond ETFs
Vanguard Short-Term Bond ETF (BSV)
This kind of bond ETF gives exposure to bonds with a short maturity, typically no more than a few years. These bond ETFs won’t move much in response to changes to interest rates, meaning they’re relatively low risk. These ETFs can be a more attractive option than owning the bonds directly because the fund is highly liquid and more diversified than any individual bond.
Vanguard Short-Term Bond ETF Performance:
- 2020 performance: 4.7 percent
- Historical performance (annual over 5 years): 2.1 percent
- Expense ratio: 0.05 percent
Some of the most widely held ETFs in this category also include iShares 1-3 Year Treasury Bond ETF (SHY) and Vanguard Short-Term Treasury ETF (VGSH).
Total bond market ETFs
Vanguard Total Bond Market ETF (BND)
This kind of bond ETF gives investors exposure to a wide selection of bonds, diversified by type, issuer, maturity and region. A total bond market ETF provides a way to gain broad bond exposure without going too heavy in one direction, making it a way to diversify a stock-heavy portfolio.
Vanguard Total Bond Market ETF Performance:
- 2020 performance: 7.7 percent
- Historical performance (annual over 5 years): 3.0 percent
- Expense ratio: 0.035 percent
Some of the most widely held ETFs also include iShares Core U.S. Aggregate Bond ETF (AGG) and Vanguard Total International Bond ETF (BNDX).
Municipal bond ETFs
iShares National Muni Bond ETF (MUB)
This kind of bond ETF gives exposure to bonds issued by states and cities, and interest on these bonds is typically tax-free, though it’s lower than that paid by other issuers. Muni bonds have traditionally been one of the safest areas of the bond market, though if you own out-of-state munis in a fund, you will lose the tax benefits in your home state, though not at the federal level. Given the tax advantages, it is advantageous to consider a municipal bond ETF that invests in your state of residence.
iShares National Muni Bond ETF Performance:
- 2020 performance: 5.1 percent
- Historical performance (annual over 5 years): 2.9 percent
- Expense ratio: 0.07 percent
Some of the most widely held ETFs also include Vanguard Tax-Exempt Bond ETF (VTEB) and iShares Short-Term National Muni Bond ETF (SUB).
Top balanced ETFs
iShares Core Aggressive Allocation ETF (AOA)
A balanced ETF owns both stock and bonds, and it targets a certain exposure to stock, which is often reflected in its name. These funds allow investors to have the long-term returns of stocks while reducing some of the risk with bonds, which tend to be more stable. A balanced ETF may be more suitable for long-term investors who may be a bit more conservative but need growth in their portfolio.
iShares Core Aggressive Allocation ETF Performance:
- 2020 performance: 12.8 percent
- Historical performance (annual over 5 years): 12.1 percent
- Expense ratio: 0.25 percent
Some of the most widely held balanced ETFs also include iShares Core Growth Allocation ETF (AOR) and iShares Core Moderate Allocation ETF (AOM).
Top commodity ETFs
SPDR Gold Shares (GLD)
A commodity ETF gives investors a way to own specific commodities, including agricultural goods, oil, precious metals and others without having to transact in the futures markets. The ETF may own the commodity directly or via futures contracts. Commodities tend to be quite volatile, so they may not be well-suited for all investors. However, these ETFs may allow more advanced investors to diversify their holdings, hedge out exposure to a given commodity in their other investments or make a directional bet on the price of a given commodity. The best-performing gold ETFs tend to offer highly effective portfolio diversification with added defensive stores of value.
SPDR Gold Shares ETF Performance:
- 2020 performance: 24.8 percent
- Historical performance (annual over 5 years): 5.5 percent
- Expense ratio: 0.40 percent
Some of the most widely held commodities ETFs also include iShares Silver Trust (SLV), United States Oil Fund LP (USO) and Invesco DB Agriculture Fund (DBA).
Top currency ETFs
Invesco DB US Dollar Index Bullish Fund (UUP)
A currency ETF gives investors exposure to a specific currency by simply buying an ETF rather than accessing the foreign exchange (forex) markets. Investors can gain access to some of the world’s most widely traded currencies, including the U.S. Dollar, the Euro, the British Pound, the Swiss Franc, the Japanese Yen and more. These ETFs are more suitable for advanced investors who may be seeking a way to hedge out exposure to a specific currency in their other investments or to simply make a directional bet on the value of a currency.
Invesco DB US Dollar Index Bullish Fund Performance:
- 2020 performance: -6.6 percent
- Historical performance (annual over 5 years): 0.6 percent
- Expense ratio: 0.76 percent
Some of the most widely held currency ETFs also include Invesco CurrencyShares Euro Trust (FXE) and Invesco CurrencyShares Swiss Franc Trust (FXF).
Top real estate ETFs (REIT ETFs)
Vanguard Real Estate ETF (VNQ)
Real estate ETFs usually focus on holding stocks classified as REITs, or real estate investment trusts. REITs are a convenient way to own an interest in companies that own and manage real estate, and REITs operate in many sectors of the market, including residential, commercial, industrial, lodging, cell towers, medical buildings and more. REITs typically pay out substantial dividends, which are then passed on to the holders of the ETF. These payouts make REITs and REIT ETFs particularly popular among those who need income, especially retirees. The best ETF REITs maximize dividend yields, as dividends are the main reason for investing in them.
Vanguard Real Estate ETF Performance:
- 2020 performance: -4.6 percent
- Historical performance (annual over 5 years): 7.1 percent
- Expense ratio: 0.12 percent
Some of the most widely held real estate ETFs also include iShare U.S. Real Estate ETF (IYR) and Schwab U.S. REIT ETF (SCHH).
Top volatility ETFs
iPath Series B S&P 500 VIX Short-Term Futures (VXX)
ETFs even allow investors to bet on the volatility of the stock market through what are called volatility ETFs. Volatility is measured by the CBOE Volatility Index, commonly known as the VIX. Volatility usually rises when the market is falling and investors become uneasy, so a volatility ETF can be a way to hedge your investment in the market, helping to protect it. Because of how they’re structured, they’re best-suited for traders looking for short-term moves in the market, not long-term investors looking to profit from a rise in volatility.
iPath Series B S&P 500 VIX Short-Term Futures Performance:
- 2020 performance: 11.0 percent
- Historical performance (annual over 3 years): -41.0 percent
- Expense ratio: 0.89 percent
Some of the most widely held volatility ETFs also include the ProShares VIX Mid-Term Futures ETF (VIXM) and the ProShares Short VIX Short-Term Futures ETF (SVXY).
Top leveraged ETFs
ProShares UltraPro QQQ (TQQQ)
A leveraged ETF goes up in value more rapidly than the index it’s tracking, and a leveraged ETF may target a gain that’s two or even three times higher than the daily return on its index. For example, a triple leveraged ETF based on the S&P 500 should rise 3 percent on a day the index rises 1 percent. A double leveraged ETF would target a double return. Because of how leveraged ETFs are structured, they’re best-suited for traders looking for short-term returns on the target index over a few days, rather than long-term investors.
ProShares UltraPro QQQ ETF Performance:
- 2020 performance: 110 percent
- Historical performance (annual over 5 years): 72.5 percent
- Expense ratio: 0.95 percent
Some of the most widely held leveraged ETFs also include ProShares Ultra QQQ (QLD), Direxion Daily Semiconductor Bull 3x Shares (SOXL) and ProShares Ultra S&P 500 (SSO).
Top inverse ETFs
ProShares Short S&P 500 ETF (SH)
Inverse ETFs go up in value when the market declines, and they allow investors to buy one fund that inversely tracks a specific index such as the S&P 500 or Nasdaq 100. These ETFs may target the exact inverse performance of the index, or they may try to offer two or three times the performance, like a leveraged ETF. For example, if the S&P 500 fell 2 percent in a day, a triple inverse should rise about 6 percent that day. Because of how they’re structured, inverse ETFs are best-suited for traders looking to capitalize on short-term declines in an index.
ProShares Short S&P 500 ETF Performance:
- 2020 performance: -25.1 percent
- Historical performance (annual over 5 years): -16.8 percent
- Expense ratio: 0.90 percent
Some of the most widely held inverse ETFs also include ProShares UltraPro Short QQQ (SQQQ) and ProShares UltraShort S&P 500 (SDS).
How ETFs work
An exchange-traded fund is an investment fund that trades on a stock exchange. ETFs may hold positions in many different assets, including stocks, bonds and sometimes commodities.
ETFs most often track a specific index such as the Standard & Poor’s 500 or the Nasdaq 100, meaning it holds positions in the index companies at their same relative weights in the index.
So by buying one share in the ETF, an investor effectively purchases a (tiny) share in all the assets held in the fund.
ETFs are often themed around a specific collection of stocks. An S&P 500 index fund is one of the most popular themes, but themes also include value or growth stocks, dividend-paying stocks, country-based investments, disruptive technologies, specific industries like information technology or healthcare, various bond maturities (short, medium and long) and many others.
The ETF’s return depends on the investments that it owns. If the investments do well, then the ETF’s price will rise. If the investments do poorly, then the ETF’s price will fall.
For running an ETF, the fund company charges a fee called an expense ratio. The expense ratio is the annual percentage of your total investment in the fund. For example, an ETF might charge a fee of 0.12 percent. That means on an annual basis an investor would pay $12 for every $10,000 invested in the fund. Low-cost ETFs are very popular with investors.
How to invest in ETFs
It’s relatively easy to invest in ETFs, and this fact makes them popular with investors. You can buy and sell them on an exchange like a regular stock. Here’s how to invest in an ETF:
1. Find which ETF you want to buy
You have a choice of more than 2,000 ETFs trading in the U.S., so you’ll have to sift through the funds to determine which one you want to buy.
One good option is to buy an index fund based on the S&P 500, since it includes the top publicly traded stocks listed in the U.S. (Plus, it’s the recommendation of super investor Warren Buffett.) But other broad-based index funds can also be a good choice, reducing (but not eliminating) your investment risk. Many companies offer similar index funds, so compare the expense ratio on each to see which one offers the best deal.
Once you’ve found a fund to invest in, note its ticker symbol, a three- or four-letter code.
2. Figure out how much you can invest
Now determine how much you’re able to invest in the ETF. You may have a specific amount available to you now that you want to put into the market. But what you can invest may also depend on the price of the ETF.
An ETF may trade at a price of $10 or $15 or maybe even a few hundred dollars per share. Generally, you’ll need to buy at least one whole share when placing an order. However, if you use a broker that allows fractional shares, you can put any amount of money to work, regardless of the ETF price. In many cases these brokers do not charge a trading commission either.
Fortunes are built over years, so it’s important to continue to add money to the market over time. So you should also determine how much you can add to the market regularly over time.
3. Place the order with your broker
Now it’s time to place the order with your broker. If you have money in the account already, you can place the trade using the ETF’s ticker symbol. If not, deposit money into the account and then place the trade when the money clears.
If you don’t have a brokerage account, it usually takes just a few minutes to set one up. A handful of brokers such as Robinhood and Webull allow you to instantly fund your account. So in some cases you could be started and fully trading in minutes.
Exchange Traded Fund (ETFs) FAQ
Are ETFs a good type of investment?
ETFs are a good kind of investment because of the benefits they deliver to investors, and ETFs can generate significant returns for investors, if they select the right funds.
ETFs provide several benefits to investors, including the ability to buy multiple assets in one fund, the risk-reducing benefits of diversification and the generally low costs to manage the fund. The cheapest funds are generally passively managed and may cost just a few dollars annually for every $10,000 invested. Plus, passively managed ETFs often perform much better than actively managed ones.
How an individual ETF performs depends completely on the stocks, bonds and other assets that it owns. If these assets rise in value, then the ETF will rise in value, too. If the assets fall, so will the ETF. The performance of the ETF is just the weighted average of the return of its holdings.
So not all ETFs are the same, and that’s why it’s important to know what your ETF owns.
What’s the difference between ETFs and stocks?
An ETF may hold stakes in many different kinds of assets, including stocks and bonds. In contrast, a stock is an ownership interest in a specific company. While some ETFs consist entirely of stocks, an ETF and stock behave differently:
- Stocks usually fluctuate more than ETFs. An individual stock usually moves around a lot more than an ETF does. That means you might make or lose more money on an individual stock than you would on an ETF.
- ETFs are more diversified. By buying a stock ETF you’re taking advantage of the power of diversification, putting your eggs in many different stocks rather than just one stock or a few individual stocks. This helps reduce your risk over time.
- Returns on a stock ETF depend on many companies, not just one. The performance of an ETF depends on the weighted average performance of its investments, whereas with an individual stock the return depends entirely on the performance of that one company.
Those differences are some of the most important between ETFs and stocks.
What’s the difference between ETFs and mutual funds?
ETFs and mutual funds both have similar structures and benefits. They both can offer a pool of investments such as stocks and bonds, reduced risk due to diversification (compared to single stock holdings or a portfolio of a few stocks), low management fees and the potential for attractive returns.
But these two types of funds differ in some key ways:
- ETFs are usually passive investments. Most ETFs usually just follow a predetermined index, investing mechanically based on whatever is in the index. In contrast, mutual funds are often actively managed, meaning a fund manager is investing the money, ideally to try to beat the market. Research shows that over the long term passive management usually wins.
- ETFs are often cheaper than mutual funds. Passive investing is cheaper to set up than active management, where the fund company must pay a team of experts to analyze the market. As a result, ETFs are cheaper than mutual funds as a whole, though passively managed index mutual funds can be cheaper than ETFs.
- Commissions may be higher with mutual funds. Today, virtually all major online brokers do not charge a commission to buy ETFs. In contrast, many mutual funds do have a sales commission, depending on the brokerage, though many are also offered for no trading commission, too.
- ETFs do not have sales loads. Sometimes mutual funds may have a sales load, which is a further commission to the salesperson. These funds can be 1 or even 2 percent of your total investment, hurting your returns. ETFs do not have these fees.
The Simple 4 ETF Retirement Portfolio
With more than 2000 different ETFs to choose from currently, retirees can position their portfolio in almost any way they want by targeting or overweighting just about any region, sector, theme or strategy they can imagine. One thing the ETF industry does perhaps the best is exactly the opposite of variety - simplicity.
If you want a widely diversified portfolio that hits on all the major asset classes, ETFs can do it. Better yet, you can have this kind of core portfolio for a cost of next to nothing. According to ETF Action, there are currently more than 70 different ETFs that charge 0.05% or less annually.
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From those 70+ ETFs, you want to make sure you're getting the proper diversification. If you build simply on cost and go with the cheapest of this bunch, you're pretty much going to be left with a bunch of U.S. large-cap funds. That's not exactly building a well-rounded portfolio.
You could probably narrow things down to as little as two funds if you want to make it as simple as possible, but I think four will do the trick. Granted, even with a quartet of highly diversified funds, you're still going to find some minor holes and nitpicks, but that's the beauty of the ETF marketplace. You can always augment your core positions to tilt your portfolio in any which way you choose.
If you were looking to build a simple and diversified portfolio that would be suitable for most retirees, I'd consider using the following four ETFs.
Vanguard Total Stock Market ETF (VTI)
This ETF would be your core U.S. stock position. It holds positions in nearly 4,000 different stocks across the large-cap, mid-cap and small-cap spectrum. It is a market cap-weighted index, however, so you've got heavy allocations to all the big mega-cap names, including Apple (APPL), Amazon (AMZN), Microsoft (MSFT) and Alphabet (GOOG). As a result, you've got about 89% of assets falling into the large-cap category.
Large-caps have been the best-performing U.S. equity market group for years now, so it would be understandable if you wanted to tilt your portfolio a little heavier towards smaller companies. Plus, an 89% allocation to large-caps isn't really that much different than just holding an S&P 500 ETF instead. If you want to stick with the Vanguard family, the Vanguard Mid-Cap ETF (VO), the Vanguard Small-Cap ETF (VB) or the Vanguard Russell 2000 ETF (VTWO) would be your best choices.
Vanguard Total International Stock ETF (VXUS)
International stocks haven't really done much to inspire investor confidence over the past several years. Since the beginning of 2008, an investment in the MSCI EAFE index or the MSCI Emerging Markets index would have earned 4% and 1%, respectively. During the same time, the S&P 500 has returned roughly 200%. It's no wonder why so many investors are overweight U.S. equities in their portfolios.
Still, foreign equities are an important asset class to have in your portfolio. History has shown that U.S. leadership and international leadership in the stock market alternate in roughly 10-year cycles. So you could make the argument that we're due for a turnaround. Of course, with so many countries presenting so many different risk/return profiles (economically, politically, etc.), it makes sense to have as much diversification as possible.
What makes VXUS attractive is that 25% of the portfolio is dedicated to emerging markets. That's a little higher than you find in many broad international stock ETFs, but emerging markets present perhaps the best risk/reward opportunity among the trio of U.S./developed/emerging markets. Instability over in China and significant delta variant impacts are making emerging markets especially risky in the short-term, but this is still an ideal long-term holding.
You could make the argument that emerging markets exposure may be inappropriate for retirees that are likely focusing on principal protection at this point in their lives. I think that's a fair point, although I think emerging markets belong to some degree. Keep in mind also that this will be part of a 4 ETF portfolio and depending on your personal allocation among the four, emerging markets will be a relatively small piece of the puzzle overall. Even if you dedicate 20% of your portfolio to international stocks, that would translate to a 5% allocation to emerging markets. Enough to give it a presence, but likely not enough to move the needle in a major way.
I'll also point out that the Vanguard Total World Stock ETF (VT) also exists, which is substantially similar to a 60/40 allocation to VTI/VXUS. If you're comfortable with a 60/40 U.S./international mix within the stock portion of your portfolio, I have no issue with using this as a replacement for VTI and VXUS. I tend to prefer using the two ETFs separately so it allows some flexibility in establishing my own allocations, but it's a personal choice.
iShares Core Total USD Bond Market ETF (IUSB)
I think many investors would probably default to the iShares U.S. Aggregate Bond ETF (AGG) here, but I prefer IUSB. The reasons are primarily related to the differences in portfolio composition between the two.
AGG tends to be more heavily skewed towards government and mortgage-backed securities. This ETF has about 64% of assets dedicated to these two groups combined compared to 54% for IUSB. In addition, IUSB has roughly 8% of assets invested in junk bonds, whereas AGG has no exposure at all to this group. I think IUSB has a better degree of diversification overall and does a better job of capturing the overall U.S. bond market.
The one thing that's missing in both ETFs is international bond exposure (IUSB's main qualifying criteria is U.S. dollar-denominated bonds, so while there is modest exposure to non-U.S. issuers, there is a lack of pure international investment). There's also the Vanguard Total World Bond ETF (BNDW) as an option. It has a 50/50 split between U.S. and international bonds, but like AGG, has almost zero junk bond exposure.
If you want your bond allocation to include both junk bonds and international exposure, you'll probably need to go with two ETFs instead of one. The Vanguard Total International Bond ETF (BNDX) could work with IUSB, but it invests strictly in investment-grade bonds, so a pairing with AGG would still omit junk bonds.
This gets a little trickier, but IUSB is still my single fixed income ETF of choice.
Schwab U.S. REIT ETF (SCHH)
Most portfolio advisor-types would suggest a 5-10% allocation to real estate and I would tend to agree. Both VTI and VXUS each only have roughly a 3% allocation to real estate, so the current portfolio as constructed just isn't going to cut it.
That's why I'd add in SCHH here to get the overall REIT allocation back into that range. The Vanguard Real Estate ETF (VNQ) owns roughly half of the assets of the real estate ETF space, but I prefer SCHH because it's the cheapest ETF in this group (by a single basis point, but still) and it has a solid degree of both diversification and quality. It focus on some of the biggest and financially healthy REITs available and adds both mortgage and hybrid REITs to improve the mix.
How To Build A Portfolio Allocation
Here comes the trickier part - how to allocate to each of these four ETFs to find the right mix.
This will mostly depend on personal preference and circumstances. The "Rule of 100" used to guide how retirees should allocate their portfolios. This tenet said that you should subtract your age from 100 and that's how much you should invest in stocks. For example, a 70-year old should have 30% of their portfolio in equities according to this rule.
This sort of changed to the "Rule of 120" over the past decade or two with people citing longer lifespans as the reason. Let's split the difference and create the rule of "Rule of 110". In this example, let's use an overall 40/60 stock/bond allocation as our example keeping in mind that you can tweak it higher or lower if you want.
We talked already about a 5-10% allocation to real estate as our guideline. Let's go towards the higher end with 10% since retirees are probably going to want to focus on higher current income. A higher allocation to REITs allows for that.
That would leave the 60% fixed income allocation to IUSB and the remaining 30% to be split between VTI and VXUS. Most people tend to favor U.S. equities in their portfolio, but keeping at least some in international stocks is important. Let's put 20% in VTI and 10% in VXUS.
Now that we've got our model portfolio filled out, let's see what Portfolio Visualizer says our actual portfolio looks like.
The created a target of 20/10/60/10 for U.S./international/fixed income/REITs. Portfolio Visualizer says that, according to its categorization, our allocation is 27/9/63/? with our allocation to REITs falling somewhere in the 27% number. There's a modest drift towards fixed income, but not too bad.
For retirees looking for the simplest, lowest cost portfolio appropriate for their golden years, this 4 ETF portfolio I laid out here could certainly do the trick. Its weighted expense ratio of around 0.07% ensures that almost all of your money stays in your pockets.
The allocations within this group should be fluid and should depend on your personal risk tolerances and goals. Risk seekers will probably have few qualms going well above the 40% equity target I mentioned, while others could go as much as all-in on bonds. I encourage you to consider what is most comfortable for you and meets your individual goals before proceeding. And if you prefer to tilt your portfolio towards a specific asset, sector or theme, don't hesitate to look into adding another low-cost ETF or two to round things out.
The one drawback to this, of course, in the current market environment is yield. Or lack of it. If you're looking to live purely off of portfolio income, the current yield of around 2% from this portfolio probably isn't going to cut it. The temptation might be to drift further out on the risk spectrum by looking at junk bonds, mortgage REITs, MLPs or other high yield asset classes. I'd urge investors to use extreme caution before venturing heavily into these types of assets will expose you to significant downside risk in case conditions turn south. Look no further than the returns of these groups during the COVID bear market to see what can happen. It may be wiser to consider withdrawing a portion of your portfolio balance to augment what you can receive in dividend yield instead of increasing risk.
If you're looking for a nice core portfolio to build on for retirement, I think these 4 ETFs along with some of the alternatives mentioned will help most retirees hit their goals.
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Etf best retirement
Three Must-Have ETFs to Anchor Your Retirement Portfolio
Building a retirement portfolio that can sustain you throughout your senior years can be challenging because you need the right balance between growth and security. You also don't want to constantly monitor your portfolio, as you'll be too busy enjoying life. After all, isn't that what you worked so hard for all these years?
In order to keep the money from your investments flowing in while simultaneously providing portfolio stability, you need to have some key holdings that can serve as anchors for your other investments. With this in mind, three Motley Fool contributors recommend the Invesco S&P 500 Equal Weight ETF (NYSEMKT:RSP), the Vanguard Total Bond Market Index(NASDAQ:BND), and the SPDR S&P Dividend ETF (NYSEMKT:SDY) as core investments for your retirement portfolio.
Image source: Getty Images.
A potentially better way to invest in an index-related fund
Chuck Saletta (Invesco S&P 500 Equal Weight ETF): Index-based investing has long provided ordinary investors with the opportunity to outperform funds run by Wall Street's best and brightest. With one-stop diversification plus results that generally beat the pros, indexing has become a great way to make money over time with very little effort needed.
While that trend has continued in recent years, the current state of the market has exposed what could be a potential flaw in traditional indexing. That flaw is this: Most index funds are market-capitalization weighted, so the largest companies in the index have a disproportionately large impact on the fund.
For example, the SPDR S&P 500 Index ETF tracks the S&P 500, an index with about 500 different companies in it. In that fund, the top 10 holdings make up over 27% of the fund's value, despite representing a mere 2% of the number of companies in the fund's universe.
That's fine and dandy if those companies are growing, but the challenge is that the bigger a company gets, the harder it is for that company to outgrow the market. That's because every percentage point of growth requires that many more dollars -- and past a certain point, those incremental dollars get harder to generate sustainably. It also raises the stakes if one of those behemoths happens to stumble, as that company-specific pain would also affect the index fund more.
To address that potential flaw, the Invesco S&P 500 Equal Weight ETF spreads its investments approximately equally across all of the companies in the S&P 500 index. As a result, its top 10 holdings represent only around 2.5% of the fund's value. That's better diversification and less money tied up in the absolute largest companies in the index.
As befitting a good index-based investment, the Invesco S&P 500 Equal Weight ETF has a reasonably low 0.2% expense ratio and low churn of its holdings. That helps it pass on more of the returns of the companies it owns to its shareholders.
That combination of factors makes the Invesco S&P 500 Equal Weight EFT worthy of consideration for a must-have ETF to anchor your retirement portfolio.
Image source: Getty Images.
Barbara Eisner Bayer (Vanguard Total Bond Market ETF): If you've spent your working years funneling your retirement savings into stocks, like I have, you might not be familiar with the nuances of investing in bonds. But they're a necessary component of principal preservation once you stop working and start living off your savings.
But where to begin? There are Treasury bonds, municipal bonds, corporate bonds, and savings bonds. What's a stockhead to do? The answer, of course, is to buy the Vanguard Total Bond Market ETF, which provides exposure to numerous bonds and can serve as the anchor for the bond portion of your retirement portfolio.
According to Vanguard, when you buy this fund, you'll get "broad exposure to the taxable investment-grade U.S. dollar-denominated bond market, excluding inflation-protected and tax-exempt bonds." In other words, you'll have very safe and relatively risk-free exposure to the bond market as a whole.
The fund holds total net assets worth $317 billion and owns 10,099 bonds with an average duration of 6.8 years, so there's very little turnover. And with its variety of bonds -- 65% in U.S. government bonds, 19.2% in A-level bonds, and 15.8% in B-level bonds -- you're looking at a pretty safe investment. With an extremely low expense ratio of 0.035%, this Vanguard fund won't cost you an arm and a leg to own.
Don't expect stock market style returns, however. Remember: Bonds are there to provide stability and preservation of principal, not mouth-watering growth. The three-year average return for this ETF is 5.41%, which is quite a bit higher than you'd normally expect. Since its inception in 2007, the fund has provided investors with an average annual return of 4.16%, which isn't too shabby considering the security it provides.
All retirement portfolios need stability, and bonds are where that treasure can be found. The Vanguard Total Bond Market ETF is the perfect place to put your money to anchor a secure and worry-free retirement.
Image source: Getty Images.
An aristocrat among ETFs
Eric Volkman (SPDR S&P Dividend ETF): One solid strategy for retirees (or those nearing retirement) is to invest in reliable companies that pay regular dividends. After all, in our post-work years, there's nothing better than receiving a constant stream of income from our investments.
So I'd be looking for an ETF that concentrates on such companies. One that stands out to me is the SPDR S&P Dividend ETF, which tracks the S&P High Yield Dividend Aristocrats index. As the name of the index suggests, its components are companies that have boosted their shareholder payouts at least once annually for a minimum of 20 years. That's five years shorter than the widely held standard for a quarter-century streak, but that's how this fund bestows the title.
The ETF's official website nails the appeal of such titles: "Due to the index screen for 20 years of consecutively raising dividends, stocks included in the Index have both capital growth and dividend income characteristics, as opposed to stocks that are pure yield."
There are some real performers in the ETF's portfolio. For example the top holding, ExxonMobil, has seen its total return (share price change plus dividends) rise by over 43% so far this year.
Another appealing feature of the SPDR S&P Dividend ETF is its diversity. The portfolio covers many economic sectors including tech, pharmaceuticals, financials, and consumer goods.
This ETF likes its high-yield stocks. ExxonMobil certainly falls into this category, with a nearly 6.3% yield. AT&T also has a high-yield dividend, at 7.6%, as does the lesser-known South Jersey Industries (a natural gas utility), with 5.2%.
Since the SPDR S&P Dividend ETF aims to spread risk by owning a big basket of stocks (112 in total), many of its holdings do have significantly lower yields. So overall, the yield of the ETF itself doesn't approach those of its star holdings. Still, at nearly 2.7%, it's more than double the 1.3% of that king of all stock indexes, the S&P 500.
And let's not forget: It's a collection of some of the most dependable payers (and raisers) money can buy.
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