I'm a big believer in the idea that investors with the time, knowledge, and desire to do so can beat the market over time with a portfolio of individual stocks. However, when I've added money to my retirement accounts recently, most of it has been used to buy shares of high-quality, low-cost index fund ETFs.
There are a few reasons I'm focusing more on index funds than individual stock investing in my retirement account this year.
- I've spent most of my 12 years covering the stock market building a portfolio of individual stocks that could be excellent retirement investments. Just to name a few, top holdings in my retirement account include Berkshire Hathaway (BRK.B 0.79%), Realty Income (O 0.70%), and Walt Disney (DIS -0.01%).
- There is nothing wrong with using ETFs to establish a "core" for a portfolio of individual stocks, and my portfolio's core isn't quite where it should be.
- I'm getting older. While I'm in my early 40s and still a couple of decades away from retirement, my risk tolerance is significantly lower than when I was 22 and opening my first brokerage account.
- There are some excellent opportunities for investing in entire indices because of short-term headwinds like higher interest rates. More on that in a bit.
I won't keep you in suspense. Here are the three ETFs I've been buying in 2024 when I deposit money into my retirement account.
Vanguard S&P 500 ETF
While the S&P 500 isn't particularly cheap right now at about 3% below its all-time high, a basic S&P 500 ETF is still a great long-term addition to any retirement portfolio. The Vanguard S&P 500 ETF (VOO 0.12%) is one of the cheapest index funds in the market, with a 0.03% expense ratio, which means just $3 will go toward fees annually for every $10,000 in assets.
I'm adding this ETF not because I think it will outperform over the next year or two, but because I'm extremely confident that by the time I'm ready to retire my investment will be worth significantly more than I paid for it. After all, simply matching the market's performance over time isn't such a bad thing.
Vanguard Small-Cap Value ETF
Two of my favorite opportunities in the stock market right now are small-cap stocks and value stocks, as both have significantly underperformed the S&P 500 recently and could be big winners as interest rates fall. The Vanguard Small-Cap Value ETF (VBR -0.17%) lets me invest in both.
The short version is that small caps haven't traded for such a low price-to-book valuation relative to their large-cap counterparts in 25 years. And while the S&P 500 is close to an all-time high, most of its recent performance has been driven by growth stocks like Nvidia (NVDA 1.27%), not by value stocks. To be clear, I'm buying this ETF to hold for the long haul, but now looks like a fantastic entry point.
Vanguard Real Estate ETF
Last but certainly not least is the Vanguard Real Estate ETF (VNQ -0.28%). Real estate has been one of the worst-performing areas of the stock market over the past couple of years, as real estate investment trusts, or REITs, are highly sensitive to rising interest rates.
Because REITs are built for predictable income, their yields tend to move in the same direction as rates from risk-free investments like Treasury bonds. Since yield and price have an inverse relationship, higher yields tend to pressure REIT prices. In addition, REITs tend to rely on borrowed money to finance their operations, similar to how most people use mortgages to buy properties, and rising rates make borrowing more expensive. As rates normalize, real estate has a high probability of outperforming.
What are the best ETFs for you?
To be perfectly clear, there are plenty of excellent ETFs you could add to your portfolio, and the right choices for you depend on your investment goals and risk tolerance. For example, someone who is a little closer to retirement than me might want to put more of their capital in income-based ETFs. But with that in mind, these are three excellent and low-cost choices that could be great ETFs to buy and hold for decades.
