I first learned about ETF’s when my financial advisor was designing my retirement portfolio. The Keogh account I had from Kaiser Permanente, which was held at Charles Schwab, didn’t offer a good international fund. So we moved the money into a self-directed retirement account and that allowed me to invest in damn near anything we wanted.
There is this fear the ETF’s and index funds will take over the world. It’s like fearing that there will be more freeways than cars. Stock ETF’s hold multiple individual and unique stock funds. You can’t worry about the overgrowth of ETF’s without worrying about a hyperplastic stock market.
ETF’s are a brilliant way to own a diversified, low-cost, and indexed portfolio. Why indexed? Because broad indexes tend to outperform individual funds – over the long-run.
Only if you have a lot of time and unmatched investing skills can you pick the right funds and hold them for the right amount of time, in the right portfolio.
ETF Advantages for Retirement Investing
Here are just a few benefits of using an ETF over individual stocks and even over mutual funds.
I am not a hardcore indexer by any means. I think individuals stocks can outperform a passive index fund portfolio. The problem is that I find stock picking boring as shit and tedious as fuck. I have better things to do with my time. Such as sitting at this beautiful cafe and writing this post and learning even more about investing.
I can own a single fund (VTI) and this fund will give me an exposure to all the popular stocks which my colleagues trade on their work computer between patients.
Since I may not have $18k to invest in 18 individual Amazon stocks, I can purchase a US total market ETF and get a piece of the Amazon pie.
1% growth is a 1% growth, regardless of whether I own a portion of it or its entirety. I don’t have enough cash to invest to properly expose myself to all the big players in the US stock market; much less the international stock market.
It’s much easier to have 3 ETF’s which expose you to bonds, US stocks, and international stocks rather than having a portfolio of 35 individual funds which have to be managed and rebalanced.
ETF’s can also be traded on any brokerage platform. If you can buy an Apple stock, you can buy your favorite ETF because they are traded in the same exchange.
4. Index Strategy
Maybe you want to invest in global emerging markets because you believe that those countries will outperform the overvalued US markets. You might choose FDEM for such a tactic.
Maybe you want a specific exposure to the healthcare industry. For that you would choose a healthcare specific ETF such as VHT.
The same can be done for real estate by choosing a real estate specific ETF. This can be either commercial real estate or healthcare real estate or governmental real estate or residential.
5. Dividend Income
Some ETF’s, just like some stocks, pay dividends. This can be used as a means of earning a passive income from your ETF portfolio.
It’s not the only way to generate income from ETF’s but it’s probably the simplest way.
The majority of ETF’s are indexed, meaning that they are passive. Some interesting active ETF’s are coming on the market, but that stuff is over my head.
The expense ratio you’ll pay to hold an ETF is miniscule and many can trade ETF’s without having to pay a trading fee in their brokerage.
7. Trading Strategies
Some investors like trading, it’s designed to be a bit of an adrenaline rush. In this technology age, it makes little sense to close the markets in the afternoon and open it again in the morning. But it creates the hype and allure that is the stock market.
If you’re a value trader, which is essentially a day trader, you can have the same fun and income potential with VTI as with AAPL. The difference is that you won’t have as much volatility and your risk will be lower because of inherent diversification in the ETF.
8. Tax Strategy
I can buy a municipal bond ETF for my private brokerage account and I can buy a broad bond ETF for my retirement account.
Because an ETF is tradable on any platform where it’s offered, it’s really easy to choose the right fund with the most ideal tax consequences.