Since their inception in the early 1990s, the number of exchange-traded funds (ETFs) has grown tremendously. A broad array of ETFs are now available, specializing in broad underlying investments from equities to currencies, so it is no surprise ETFs have become popular with retail investors.
ETFs are often convenient and cost efficient—enabling retail investors to gain market exposure without purchasing individual securities. ETFs can also help you diversify your portfolio holdings.
ETFs generally offer more liquidity than mutual funds, since their shares can be bought and sold throughout the trading day, like shares of individual stocks. For these reasons, investing in ETFs for retirement may seem like a viable option, particularly for investors with smaller portfolios. But if you have larger amounts to invest, we believe there are some good reasons why other options may do a better job of helping to meet your long-term investing goals.
Exchange traded funds are similar to mutual funds in that they both pool money from many investors to purchase a diversified portfolio of stocks, bonds or other securities. Many ETFs seek to mirror the performance of a particular index, sector or asset class. For example, some ETFs are designed to move in sync with the S&P 500 index, while others track sectors such as energy or real estate, or asset classes such as small cap stocks or intermediate term bonds. Investors with smaller portfolios may be able to achieve some level of diversification by purchasing a number of different ETFs—which may help save the transaction costs associated with buying minimal amounts of several stocks or bonds.
The relative affordability of ETFs can be attractive, since you won’t pay the transaction costs associated with buying minimal amounts of several stocks or bonds. Owning and trading ETFs also tends to cost far less than mutual funds because ETFs usually don’t charge the sales loads and other fees that mutual funds generally do. However, costs can vary widely from one ETF to another.
Many ETFs are also liquid and easy to trade. Their shares can be traded throughout the day, the same way you trade stocks, whereas mutual funds settle at the end of each trading day. If you have access to the stock market, most ETFs are easy to buy and sell. In fact, ETFs are so easy to trade that many investors find it difficult to resist the temptation to do just that—and often make hasty trading decisions fueled by emotion instead of sticking to a long-term investing plan.
Generally speaking, it is possible to create a diversified retirement portfolio using ETFs, and also to modify your allocations quickly, at a relatively reasonable cost. But if you are an investor with a larger portfolio, it’s wise to take a closer look before you assume that buying ETFs is the best way to diversify your holdings.
Like any investment, there are pros and cons to holding ETFs as part of your retirement portfolio. We’ve already outlined the benefits above, so now let’s consider the limitations, which include:
With all the available ETF and mutual fund choices, analyzing whether it’s good to choose ETFs for retirement savings can be a daunting task. This becomes more important as your portfolio grows.
If you have a portfolio of $500,000 or more and want a comfortable retirement, we believe you may benefit more from working with an investment adviser who knows your goals and preferences, and is charged with looking after your best interests.
Fisher Investments is happy to provide portfolio reviews to qualified investors with $500,000 in investable assets. We can look at the mutual funds and ETFs you hold and identify overlaps in underlying assets. We can also determine whether you might benefit from direct investments.
Investors who become our clients receive specific asset allocation and investment recommendations aligned with their personalized financial goals and world-class client service from our dedicated Investment Counselors.
* The contents of this document shouldn’t be construed as tax advice. Please contact your tax professional.