Building a well-diversified retirement portfolio may seem like a daunting task to you. Having to research individual income-producing stocks then design a portfolio to maximize income and diversification can quickly turn into a full-time endeavor.
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One way to solve this dilemma is to use exchange-traded funds, or ETFs, rather than individual stocks for your retirement portfolio. While ETFs will not have the returns that some individual stocks produce, their inherent diversification can provide less volatility along with steady dividends.
First, let's take a closer look at ETFs then delve into my five favorite ETFs for retirement.
Over the last decade, volumes in ETFs have increased dramatically when compared to the rest of the marketplace. According to BlackRock, there is nearly $5 trillion of assets in the ETF market. This number is expected to explode to over $25 trillion by 2027.
To illustrate ETFs growth in 2017 alone, inflows hit a record of close to $500 billion crushing the old record of near $300 billion in 2016.
While ETF s trade like stocks on the exchange, traders need to be aware of several critical differences before adding ETFs to their retirement portfolio.
One of the most critical differences when it comes to choosing what ETF to buy is that volume does not always equal liquidity. I know this sounds strange so let me explain. ETFs allow authorized participants to create additional ETF shares out of its underlying assets. The flipside to this is that authorized participants can redeem ETF shares by converting them back into the underlying asset.
This fungibility by authorized participants means ETFs can have liquidity despite being lightly traded. These facts are critical to note when choosing which ETF to buy.
Also, unlike single trading stocks, success in trading ETFs requires a multi-asset approach due to their underlying makeup. If traders are willing to expand their horizons with ETFs, the potential is truly unlimited.
Earning income with a diversified portfolio utilizing only a few ETFs is a godsend for many investors. The question comes down to what ETFs are best for a retirement portfolio. Here are my favorites in no particular order:
1. Arrow Dow Jones Global Yield ETF (GYLD)
I like the true global diversification and high yield of GYLD. Yielding over 7%, the ETF provides the investor with equally weighted exposure to Global Sovereign Debt, Global Equity, Global Corporate Debt, Global Real Estate and Global Alternative sectors. With over $70 million in total assets distributed across more than 160 individual holdings, GYLD is ideal for the investor who wishes to maximize yield across multi-asset classes.
2. YieldShares High Income ETF (YYY)
A yield of close to 9% places this ETF in my list of favorites. Operated as "fund of funds," YYY attempts to track the performance of the ISE High Income Index. This index is built upon the top yielding closed-end funds discount to net asset value and liquidity.
The ETF holds about $200 million diversified across 30 total holdings and cash.
3. Global X SuperDividend ETF (SDIV)
An ETF that genuinely lives up to its name, SDIV boasts over $1 billion in assets spread across 100 of the world's highest yielding stocks. Yielding about 7%, this ETF is ideal for long-term global stock bulls.
4. Invesco Canadian Energy Income ETF (ENY)
An ultrahigh yield of over 13% sparked my interest in this Canadian energy-focused ETF.
ENY is built upon the S&P/TSX High Income Energy Index. At least 80% of its total assets are invested in securities that comprise the index of "high yielding" Canadian securities (with dividend yields generally higher than 1.5-2%) in the energy sector that meet size and liquidity requirements.
While I love the yield, the single sector focus demands that this one comprise only a small percentage of your portfolio.
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5. Horizons Nasdaq-100 Covered Call ETF (QYLD)
The ideal ETF for those who like the covered call strategy as an income-producing tool. Utilizing expert management, this ETF exploits the covered call strategy at a high level.
Yielding over 11%, the ETF makes sense for a retirement portfolio. Generating income from the covered call strategy without taking the time and effort to deploy it is a huge plus.
Risks To Consider: Just like with an individual stock, an ETF's dividend yield is inversely correlated with the share price. In other words, the lower the price moves, the higher the yield. Therefore, always be certain to make sure that the high yield of the ETF is not due to a crashing share price.
Action To Take: Consider adding one or more income-producing ETFs to your retirement portfolio.