Target-date funds gradually shift more resources from stocks to bonds over time. These funds aim to reduce an investor’s risk as they get closer to the target retirement year. However, this cookie-cutter approach isn’t suitable for everyone, and going too deep into bonds may make it difficult to keep up with inflation. Furthermore, some target-date funds have lofty expense ratios, which makes it even harder to deliver enticing returns.
Investors can spread their capital across three ETFs to construct an optimal retirement portfolio for their needs.
Invesco QQQ Trust
The Invesco QQQ Trust (NASDAQ:QQQ) mirrors the Nasdaq Composite. It’s a growth-oriented ETF with a lot of exposure to tech stocks, especially the Magnificent Seven. Investors shouldn’t put all of their eggs in one basket, and they especially shouldn’t go all-in on a growth ETF. However, it’s good for every retirement portfolio to include some growth.
QQQ is optimal for any funds that you won’t have to touch for at least three years. That will give your position enough time to ride market volatility and deliver long-term gains if the largest companies in the index continue to deliver exceptional gains.
The fund is up by almost 80% over the past five years and has an 0.18% expense ratio. More conservative investors may opt to choose the State Street SPDR S&P 500 ETF Trust (NASDAQ:SPY) as their growth-oriented pick, while investors who want aggressive growth for a small portion of their retirement portfolio may want to consider the VanEck Semiconductor ETF (NASDAQ:SMH), which offers exposure to AI stocks.
Vanguard Total Stock Market Index Fund ETF
Vanguard is one of the best brokerage firms for low-cost ETFs, and the Vanguard Total Stock Market Index Fund ETF (NYSEARCA:VTI) certainly delivers. This ETF follows the entire stock market and has a measly 0.03% expense ratio. It even has a 1.08% SEC yield, offering some cash flow as you hold the ETF’s shares.
This fund’s returns are a little lower than QQQ, but it doesn’t lose as much value during bearish markets. VTI has more than 3,500 stocks in its portfolio, which limits the impact of the Magnificent Seven. The purpose of this ETF is to give investors broad exposure to the entire stock market, while a pick like QQQ specifically focuses on growth-oriented opportunities.
The Vanguard Total International Stock Index Fund ETF (NASDAQ:VXUS) is an honorable mention since it holds more than 8,500 international stocks and is great for people who want exposure to non-U.S. companies. This fund has crushed the S&P 500 over the past year but has lagged the index over the past five years.
Fidelity Total Bond ETF
The Fidelity Total Bond ETF (NYSEARCA:FBND) is the ETF that reflects conservative investing and lower risk tolerance. It only contains bonds, and almost 80% of them are A-rated or higher. That includes more than two-thirds of its bonds being rated as AAA. That means the bonds are extremely safe.
The ETF has a 0.36 expense ratio and a 4.48% SEC yield. It’s a relatively low-volatility ETF that will underperform the S&P 500 during bullish market cycles, but it won’t budge much during bearish markets.
Investors who are okay with some risk in retirement may want to consider the Schwab U.S. Dividend Equity ETF (NYSEARCA:SCHD) for higher cash flow. This ETF holds roughly 100 stocks and pays out dividends, which results in more favorable tax treatment. It has a 3.62% yield and a 0.06% expense ratio. However, it’s also up by 14% year-to-date, which is unusual for the fund. Investors may want to wait for this ETF to pullback a little before buying shares.
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