Index exchange-traded funds (ETFs) are among the most popular investments on the market. That's no surprise, considering the huge benefits they pack into one simple financial package.
Owning an index ETF delivers diversification and low costs, two factors that correlate to higher investor returns over the long term. They are easier to trade compared to more actively managed mutual funds and often carry low minimum initial investment requirements. Some of the best index ETFs feature little turnover as well, which minimizes taxes and allows retirees to benefit from long-term capital gains.
But which index ETFs belong in your portfolio? Let's look at two excellent options for those at, or approaching, retirement.
1. Vanguard Total Stock Market Index Fund
Despite all the effort and technology directed toward beating the market, the truth is that most professional investors can't even match the returns of wider indexes like the S&P 500. Owning the Vanguard Total Stock Market Index Fund (VTI -1.08%)allows you to achieve that feat with essentially zero effort.
This ETF is heavily tilted toward the large-capitalization stocks that comprise the S&P 500 and is weighted by market cap. As a result, expect to have lots of exposure to the tech giants that have been powering the market's rally through 2024. Its top four holdings are Apple, Microsoft, Nvidia, and Amazon. Yet you also get exposure to hundreds of other stocks that operate outside of the tech industry, providing valuable diversity during those inevitable downturns .
The VTI fund is passively managed, meaning it's controlled by an algorithmic allocation strategy rather than a highly paid manager. That means expenses are extremely low, currently sitting at 0.03%. Keep in mind that markets are trading at new all-time highs today, though, and so it makes sense to purchase VTI at regular intervals over long periods of time so that can dollar-cost-average into higher overall returns.
2. Vanguard International High Dividend Yield ETF
Index ETFs can also work well in a portfolio that needs exposure to a certain industry segment or investing style. There's such an ETF for just about every sector, from consumer staples to high-tech chip manufacturing. But for retirees seeking dividend income and some international market exposure, take a look at Vanguard's International High Dividend Yield ETF (VYMI -0.23%).
Top components of this fund include names you might recognize, such as Nestle, Novartis, and Unilever. You not only get to own these international businesses, but you also receive an unusually high income stream from the wider fund. The ETF is true to its name and currently yields 4.6%, well above the 1.8% you'd get by owning a widely diversified U.S.-based index ETF. You still get valuable diversification as you would with owning VTI, only this time that diversification includes a geographical component. The fund's expenses are relatively low, landing at just 0.22%.
Each of these ETFs has its drawbacks, and no index fund can completely protect an investor from the market declines that happen without warning from time to time. Yet adding VTI and VYMI to your portfolio will provide exposure to both high-growth tech stocks and high-income international giants. That combination of diversity, growth, and income can be a powerful force boosting returns over a time span of many decades -- especially when you're keeping your investing costs to an absolute minimum.
