Nobody wants to work until they drop, but you may have little choice as the state retirement age climbs ever higher. Theres only one way to seize back control, and thats by investing under your own steam. The following three exchange traded funds (ETFs) are great low-cost building blocks for your retirement portfolio.
Fees cost
ETFs have come into their own in recent years as investors wake up tothe damage that high annual management fees inflicton investment fund performance. Say you invest 1o0,000 in a portfolio of actively-managed funds charging 1% a year. If itgrows at 5% a year, you will have more than doubled your money to 219,112 over 20 years. However, if your ETFs charge 0.2% on average (and somecharge as little as 0.03%), you will have 255,402, an incredible 36,290 more, assuming the same rateof fund growth.
Ifmanagers could regularly beat the market they would justify their higher costs, but three-quarters dont.Investors are waking up to the message and these three ETFsare particularly popular, numbering among the top five most traded in the UK.
Vanguard performance
The first is theVanguard S&P 500 Growth ETF (LSE: VUSA), which does exactly what it says on the tin, tracking the S&P 500. The total expense ratiois a minuscule 0.15% a year, which Vanguard claims is 87% lower than the average charge onfunds with similar holdings.
Over five years its up 140%, according to Trustnet.com, piggybacking on the boomingUS market. Look at this: the average actively-managed fund in the Investment Association North America sector hasreturned notablyless at 113%, according to Trustnet.com. The charges will be higher as well.
iSpy iShares
You wont be surprised to discover the second most popular ETF among British investorsis theiShares FTSE 100 ETF (LSE: CUKX), which tracks the UK benchmark index of blue-chip stocks. Its ongoing charges are even lower, at just 0.07%, and it has grown 52% over five years.
Unit trust trackers havealso become cheaper. For example, HSBC FTSE 100 charges just 0.18% a year. However, on 10,000 invested for 20 years, this is the difference between ending up with 25,638 (iShares) or25,298 (HSBC). That slither of a charging difference has amounted to340.
Mid-cap winner
In a single low-cost swoop, youve now bought into600 of the largest companies in the Western world, big names such as Apple, Microsoft, Exxon Mobil, Amazon andFacebook in the US, andHSBC Holdings, Royal Dutch Shell, BP and British American Tobacco in the UK.
My third suggestion for your early retirement ETF portfolio is the iShares FTSE 250 (FTSE: MIDD), the fifth most popular ETF in the UK. This mid-cap index has thrashedits blue-chip counterpart lately, and the ETF is up 100% accordingly. Now youhave a spread of smaller companies to go with your retirement portfolios big boys. However, the total expense ratio is slightly higher at 0.4%. Thats actually more than the HSBC FTSE 250 tracker, whose ongoing charges total 0.18%.
ETFsmay be cheap, but theyre not always cheapest. Yet when their performance is so strong, they certainly are very appealing.
Harvey Jones holds iShares FTSE 100, HSBC FTSE 100 and HSBC FTSE 250. The Motley Fool UK owns shares of and has recommended Amazon.com and Facebook. The Motley Fool UK owns shares of ExxonMobil. The Motley Fool UK has recommended BP, HSBC Holdings, and Royal Dutch Shell B. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.