Topic: ETFs

The Best Vanguard Funds for Retirement Portfolio Building will have these Key Traits

Low management fees, broad diversification, and lower-risk holdings are the aspects of the best Vanguard funds for retirement portfolio building that investors should look for

The first ETF traded in 1989. It was called the Index Participation Shares (IPS). The IPS was an S&P 500 proxy that traded on the American Stock Exchange and the Philadelphia Stock Exchange. Because this product was so new and misunderstood, a lawsuit was filed by the Chicago Mercantile Exchange to stop the sale of IPS in the U.S.

It wasn’t until later on that ETFs caught the attention of the investment market. Despite their relatively short history, they’ve become one of the lowest-risk ways to invest. (Although, we still feel that investors will profit the most with a well-balanced portfolio of high-quality individual stocks, ETFs can also play a role in a portfolio)

If you’re seeking the best ETFs, and especially the best Vanguard funds for retirement portfolio building, then you need to understand what to look for.

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Three reasons to use ETFs in your retirement portfolio

  • ETFs diversify a portfolio. You could build a diversified portfolio of conservative, mostly dividend-paying stocks spread out across most if not all of the five main economic sectors (Manufacturing & Industry, Resources, Finance, Utilities and Consumer).
  • ETFs are fairly low risk. Holding higher-risk stocks in your TFSA is a poor investment strategy because they come with a greater risk of loss. If you lose money in a TFSA, you lose both the money and the tax-deduction value of the loss. Conservative ETFs can be a good alternative.
  • ETFs are flexible. If funds are limited, you may need to choose between TFSA and RRSP contributions, but ETFs can be used for either.

The best Vanguard funds for retirement portfolio building will have lower management fees

Unlike many mutual funds, ETFs don’t load you up with heavy management fees, nor do they tie you down with heavy redemption charges if you decide to get out early. Instead, they give you a lower-cost and more flexible, convenient alternative to mutual funds.

The best ETFs represent a low-cost, tax-efficient way for investors to make money in the long term. Investors get the broad market exposure of a traditional mutual fund, plus the ability to trade at will with nominal fees.

The MERs (Management Expense Ratios) are generally much lower on ETFs than on conventional mutual funds. That’s because most ETFs take a much simpler approach to investing. Instead of actively managing clients’ investments, ETF providers invest so as to mirror the holdings and the performance of a particular stock-market index.

Selecting the best Vanguard funds for retirement portfolio building

We think you should stick with “traditional” ETFs. Traditional ETFs practice “passive” fund management, in contrast to the “active” management that conventional mutual funds provide at much higher costs. Many “new” ETFs also look to add in some active management.

Sponsors of stock indexes do from time to time change the stocks that make up the index, but generally only when the market weighting of stocks changes. They don’t attempt to pick and choose which stocks they think have the best prospects.

This traditional, passive style when adopted by ETFs also keeps turnover very low, and that in turn keeps trading costs for your ETF investment down.

Here’s a Vanguard ETF we recommend that fits these criteria: Vanguard Growth ETF, symbol VUG on New York. This ETF aims to track the Center for Research in Security Prices (CRSP) U.S. Large Cap Growth Index. It’s a broadly diversified index that consists mainly of big U.S. companies.

We think simple is better.

We also think you should use our three-part Successful Investor approach when selecting the best stocks, ETFs or Vanguard funds for retirement portfolio building:

  1. You invest mainly in high-quality stocks (or ETFs that hold those stocks), so a majority of your stocks will pay off for you eventually.
  2. You diversify among most if not all of the five main sectors. That way, you avoid the risk of investing heavily in any one group or sector that is headed for a particularly big decline (like, say, a Resources slump).
  3. You downplay or avoid stocks (or ETFs that hold their stocks) in the broker/media limelight. That helps you avoid losses that come from buying “market favourites” that are about to lose favour with investors and drop out of the limelight.

When you work out a plan for your retirement, make sure that you aren’t basing your future income on overly-optimistic calculations that will end up leaving you short. Your retirement income plan should build in contingencies for long-term medical needs and supplemental health insurance. As well, you should factor in caring for loved ones who are unable to take care of themselves.

The best Vanguard funds for retirement portfolio building can be part of a Tax-Free Savings Account (TFSA)

Exchange traded funds (ETFs) can play a role in a TFSA. In fact, using ETFs for growth within a TFSA is a popular long-term investing strategy.

While yearly contributions are limited, if you have not contributed in the past or did not meet maximum contributions in any given year, you can catch up on unused amounts.

TFSAs are a bit different than registered retirement savings plans (RRSPs) because contributions to them are not tax-deductible. Withdrawals from a TFSA, however, are not taxed.

The best ETFs for TFSA growth will also provide you with a low-cost way to increase your exposure to larger portions of market sectors.

Do you invest in Vanguard funds currently? Do you prefer them over other ETFs?

Do you think Vanguard funds should have done more to keep up with newer ETF trends or do you like them because of their simplicity?


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