If you're just not into keeping tabs on a bunch of stocks but still want to build a nice retirement nest egg, you've got options. Exchange-traded funds, or ETFs, are baskets of equities usually chosen based on a theme or category that offer all the long-term upside of the stock market, but without all the usual ups and downs of trading individual stocks. The trick is simply figuring out which ETFs are your best buy-and-hold options.
Here's a look at three of your best ETF bets for a retirement portfolio.
1. SPDR S&P 500 ETF Trust
It's a pick that's so predictable it's almost become cliche. But, there's a reason the SPDR S&P 500 ETF Trust (SPY 1.18%) continues to top lists of suggested retirement investments. That is, the broad market itself offers highly reliable, solid long-term returns. In this case, the S&P 500 averages gains of about 10% per year.
You can theoretically do better. Statistically speaking, though, you probably won't. After all, not even the professional stock pickers consistently outperform their index-based benchmarks.
Standard & Poor's regularly reports on the mutual fund industry's relative performance. The so-called SPIVA (short for "S&P Indices Versus Active") scorecard is updated every six months, comparing the results of actively managed funds to their most relevant market index. Over the course of the past five years, 74% of actively managed domestic large-cap mutual funds failed to beat the S&P 500. If you stretch the time frame out to 20 years, 94% of the actively managed large-cap funds offered to U.S. investors failed to outperform the S&P 500.
Beating the market is tough to do with any consistency. Most fund managers can't do it, and they're devoting a full-time effort to the matter, armed with all sorts of data and tools. While there's something to be said for a simpler approach to stock picking, that approach rarely offers an individual investor an edge when going up against much bigger, institutional investors competing for gains.
2, iShares Global Clean Energy ETF
To be clear, the entirety of your portfolio need not be tied up in a single S&P 500-based exchange-traded fund. There are pockets of the market with clear market-beating potential. You just have to be willing to leave these funds alone for a while and let them do their thing. One of these pockets involves the continued adoption of alternative energy sources. A top way to plug into this megatrend is with the iShares Global Clean Energy ETF (ICLN 1.49%).
Admittedly, this fund -- along with many of the stocks it holds -- has performed erratically since the ETF was launched back in 2008, dishing out more net losses than gains during that time. In retrospect, though, that weakness was rooted in the tremendous euphoria surrounding these companies before they were ready to live up to the hype. The balance between the actual opportunity and the renewable energy industry's capacity to deliver electricity is far healthier now. Indeed, there may now be more opportunity than capacity.
Take solar power as an example. Although solar panels accounted for nearly half of the United States' increase in power production capacity in 2022, the Energy Information Administration says it still only accounts for about 5% of the country's total electricity production. The agency, however, also says solar will generate about 20% of the nation's power by 2050. That's a fourfold increase in less than 30 years, and a huge opportunity for companies like First Solar and Enphase Energy, both of which are components of this fund.
The thing is, that's just solar, and that's just in the United States. The rest of the world and the rest of the renewables business is looking ahead at the same sort of growth.
3. Vanguard Dividend Appreciation Index Fund
Finally, add the Vanguard Dividend Appreciation Index Fund (VIG 0.28%) to your list of ETFs that may be all you need to own in your retirement fund.
This ETF's current yield of just under 2% is respectable, but not exactly exciting; there are higher-yielding options out there. Just as the name suggests, though, the Vanguard Dividend Appreciation Index Fund is designed to drive reliable dividend increases over time. And it's done just that. Last year's total payouts of $2.97 per share are more than twice the fund's annual dividend from just 10 years earlier. If history repeats itself (and there's no reason to suspect it won't), this ETF's annual dividend payment will double again by 2032.
The bullish argument for holding this fund isn't just the ever-increasing payout. As the chart above shows, there's also capital appreciation on the table here. The ETF's price has also nearly tripled over the course of the past 10 years, outpacing its dividend's growth.
That's superficially surprising to some investors. After all, dividend-paying companies typically aren't known for big-time growth.
But the fund's performance actually makes good sense. Companies that are capable of upping their payouts year in and year out are capable of doing so because their businesses are built to last regardless of the economic environment. This is the sort of resiliency investors are willing to pay for -- and come back to -- when they remember there's a great deal to be said for reliability.
The only catch? Even if you're reinvesting the Vanguard Dividend Appreciation Index Fund's dividend payments in more shares of the ETF, your net gains may feel like they're getting a slow start. They'll accelerate every year you own the fund, however, meaning most of your growth will materialize in just the last few years of your holding period.
