The Case For ETFs In Retirement Portfolios

The pandemic has made nearly a quarter of retirees somewhat or significantly less confident they will have enough money to live comfortably throughout retirement, according to the Employee Benefit Research Institute (EBRI) 2021 Retirement Confidence Survey. Retirees also report that after their Social Security income, their second income source is personal savings followed by pension plans, IRAs, and DC plans. More people who are saving for retirement, or are already in retirement, need to rely on multiple sources of income, with the brunt of the effort falling on individuals and their financial advisors and less on their current or former employers.

To help your clients make the most of their retirement years, you may want to consider investing in ETFs alongside other investment vehicles in your clients’ portfolios. For clients with retirement looming near, fixed income and dividend-paying ETFs can provide your clients with steady income.

In recent years, ETFs have become increasingly popular—and for good reason. They are diversified, transparent, cost-effective, tax efficient, and flexible. Here’s a look at the potential benefits of including ETFs in your clients’ retirement portfolios.

1. ETFs Provide Diversification

ETFs, like mutual funds, offer diversification. You can invest your clients’ money in several companies without buying all the individual stocks that make up the fund. Diversification can reduce risk of loss, which is always particularly more important in retirement. This approach may bring peace of mind to your clients, especially if they fear losing money they’ve invested in only one or two companies that perform poorly. Diversifying a client portfolio with ETFs provides exposure to several different companies so if a few perform poorly, your clients could be less likely to be affected. Funds also remove the burden of selecting individual stocks and bonds, which can be time-consuming.

Of course, not all funds provide the same level of diversification. Sector ETFs, for example, offer diversification within a given sector, but investments across sectors can offer broader market diversification.

2. Most ETF Holdings are Transparent

Many ETFs list their fund holdings daily, whereas mutual funds typically disclose their holdings on a quarterly basis. While we aren’t suggesting it’s necessary to look at the holdings daily, it’s always good to know that information is readily available.

3. You Don’t Need A Lot of Money to Invest in ETFs

Shares of some ETFs can be purchased with as little as $30, while some mutual funds require a minimum initial investment of several thousand dollars. Lower costs make it easier for clients who want or need to make smaller monthly allocations.

The low initial investment also makes it easier to invest in multiple ETFs, but with mutual funds, they might need thousands of dollars before investing in more funds.

4. ETF Fees Are Usually Low

Fees (broker commissions and expense ratios) add up over time. Since many retirees have large shares of their portfolios in low-returning investments like cash, focusing on low-cost investments can effectively enhance take-home returns.

Many brokers offer zero-commission ETFs, eliminating the fee every time an ETF is bought or sold. Since this isn’t true of all ETFs, we recommend thorough due diligence on the fees of every ETF you’re considering.

ETF expense ratios are typically lower than mutual fund expense ratios. Some actively-managed mutual fund expense ratios can be upwards of 1%. Clients may not appreciate having to pay $10 for every $1,000 invested. Passive ETFs generally have much lower expense ratios.

5. The Tax-Efficiency Stakes may be Higher in Retirement

Taxes are another area where the advantage accrues to ETFs in retirement. ETFs tend to be more tax-efficient relative to their actively-managed counterparts.

Managing for tax efficiency is important at every stage in life, but it’s arguably most important in retirement. Investor portfolios tend to be big leading up to and during retirement; the share of the portfolio parked in taxable accounts is also apt to be highest at that stage of life. Controlling taxable income in retirement doesn’t just have the potential to lower your clients’ tax bills, but it may also reduce the extent to which their Social Security income is taxed and help reduce their susceptibility to Medicare premium surcharges that apply to high-income Medicare enrollees.

6. ETFs Lend Themselves Well to Providing an Income Stream

Fixed income ETFs and dividend ETFs can generate steady income to help retirees pay for living expenses. Sound Income Strategies, LLC is an RIA firm specializing in the active-management of income-generating portfolios, and we believe planning and saving for retirement is all about investing for income. Our goal is to help maximize the income generated by our clients’ investments first and foremost, with growth potential as a secondary consideration.

ETFs are a worthy consideration for investors saving for retirement, or in retirement. To this end, Sound Income Strategies provides two actively-managed income ETFs: Sound Equity Income ETF (SDEI) and Sound Enhanced Fixed Income ETF (SDEF). These funds were created specifically for clients who need income from their investments. Our ETFs offer income-generating insights that we’ve provided our clients over the past 20 years. Please contact your Investment Advisor Representative to see if either of these ETFs are suitable for you and your portfolio.

A retirement portfolio that includes a variety of investment vehicles, including ETFs combined with personalized and unbiased advice can be the ideal solution for today’s retirement savers and retirees.

Investment Advisory Services offered through Sound Income Strategies, LLC, an SEC Registered Investment Advisory Firm. The Retirement Income Store® , LLC and Sound Income Strategies, LLC are associated entities.
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Investing involves risk, including the potential loss of principal. There is no guarantee that the Funds investment strategy will be successful. Shares may trade at a premium or discount to their NAV in the secondary market. The Fund is new and has a limited operating history. The Fund has a limited number of financial institutions that are authorized to purchase and redeem shares directly from the Fund; and there may be a limited number of market makers or other liquidity providers in the marketplace. These and other risks can be found in the prospectus.

The Fund is distributed by Foreside Fund Services, LLC.

  1. https://www.ebri.org/docs/default-source/rcs/2021-rcs/2021-rcs-summary-report.pdf?sfvrsn=bd83a2f_2

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