Investments to consider ETFs for retirement

Senior investors who are looking for diversification in their portfolio may want to consider exchange-traded funds.

A stock exchange with shares that investors can buy and sell on a stock exchange is an investment vehicle with shares that are owned and sold at a market-determined price, says Harman Johal, a wealth management market leader for Texas and Illinois at the U.S. Bank in Houston.

Johal explains that ETFs are primarily passive investments that seek to replicate the performance of a particular index.

In the last decade, ETFs have gained popularity among institutional and individual investors and have gained more than $3.4 trillion in assets, according to Johal, who told FOX Business. Since ETFs are primarily passive, this results in lower expense ratios compared to actively managed funds. Some ETFs charge less than 0.05%, which is a sizable advantage over actively managed funds that charge an average of over 0.50%. He says passive ETFs are tax efficient as they track an index and don't require frequent trading, which helps to minimize the capital gains they have to distribute.

Why do senior investors should consider an ETF?

According to Investment Company Institute research, 76% of the ETF households are retirement, a common goal. According to BlackRock, 30% of the investors over the age of 70 have an ETF, he says.

ETFs can be cost-effective options for investors who are near retirement and looking to change their portfolios from growth-oriented ones to portfolios that can provide a balance of growth and income, Johal says.

He believes that cost efficiency is an important consideration for senior investors as they are moving from a growth strategy to an income strategy, because they are shifting from a growth strategy to a growth strategy.

Johal says that keeping expenses low helps ensure that a higher percentage of the returns goes to the investor.

Johal explains that ETFs tend to have an advantage over actively managed funds in terms of tax efficiency, low cost, low investment minimums and transparency of holdings within an ETF. Some specialty asset class ETFs may be difficult to sell exactly when the investor wants to invest in ETFs, and some specialty asset class ETFs may have a wider bid ask spread, and some specialty asset class ETFs may be hard to sell, he adds.

What is the best strategy for an ETF?

According to Johal, retirees can consider three different strategies to make income from ETFs: bond fund ETFs, bond fund ETFs, and real estate investment trust ETFs.

How can retirees incorporate both short-term income generation and long-term advantages?

Roxanna Islam, associate director of research at VettaFi, said retirees looking for income generation can invest in dividend ETFs and other income ETFs that can provide regular income distributions while reducing single stock risk.

Senior investors can hold these ETFs for a longer term and expect a relatively stable yield because of the diversification benefits without the need to manually buy and sell stocks in anticipation of dividend changes, Islam says.