Investing in powerful consumer brands, solid tech companies, and dividend growth stocks could be a smart way to invest for retirement.
By Andres Cardenal
When investing for retirement, you typically want to keep your risks under control while at the same time optimizing your returns over the long haul. With this in mind, exchange-traded funds (ETFs) can be valuable investing vehicles to obtain diversification in a simple and cost-effective way.
For investors looking to build retirement wealth via ETFs, Consumer Discretionary Select Sector SPDR ETF (NYSEMKT:XLY), Vanguard Information Technology (NYSEMKT:VGT), and Vanguard Dividend Appreciation ETF (NYSEMKT:VIG) are interesting alternatives to consider.
Betting on the U.S. consumer
Consumer discretionary companies are those providing nonessential goods and services, meaning things and experiences that you want to buy but don’t necessarily need in order to survive. This includes a wide array of sectors such as entertainment, apparel, retail, and restaurants, among several others.
The unemployment rate is currently quite low at 5%, and cheap gas prices allow consumers to spend a few extra bucks on discretionary products and services, so the sector could be enjoying some economic tailwinds over the middle term.
Consumer Discretionary Select Sector SPDR ETF is an ETF providing exposure to almost 90 companies in the consumer discretionary sector. The portfolio includes many of the most popular consumer brands in the world, including names such as Amazon, Disney, Starbucks, and Netflix, to name just a few examples. The ETF carries a conveniently low annual expense ratio of only 0.14%.
Discretionary spending tends to fluctuate considerably with the ups and downs in the economy, so companies in this sector are particularly cyclical. On the other hand, betting on the consumer discretionary sector can be enormously profitable over the long term.
The following chart compares performance for Consumer Discretionary Select Sector SPDR ETF against S&P Depository Receipts (NYSEMKT:SPY), a popular ETF tracking the broad S&P 500 index. An image is worth a thousand words, and while past performance is no guarantee of future returns, it’s worth noting that betting on the U.S. consumer has been a winning proposition over the years.
A diversified play on the tech sector
Growth and innovation can be a powerful return drivers for investors, and the tech sector is fertile ground for dynamic companies with plenty of growth potential. On the other hand, the sector is always changing: The winner of today can easily turn out to be the loser of tomorrow, so competitive risk is an important consideration when investing in technology.
With this in mind, investing in the tech sector through ETFs can be a smart strategy to capitalize on the particularly promising growth opportunities technology can offer while at the same time keeping competitive risk at bay via diversification.
Vanguard Information Technology invests in a widely diversified portfolio of nearly 380 tech companies, including leading industry names such as Apple, Alphabet, Microsoft, and Facebook. The average market capitalization for companies in the ETF is $149 billion, so Vanguard Information Technology is mostly focused on large companies, which typically provides more stability and global exposure for investors.
Vanguard Information Technology has a remarkably low annual expense ratio of 0.1%. According to Vanguard, this is 93% lower than the average expense ratio of funds with similar holdings.
Dividend growth stocks to outperform the market
Investing in dividend growth stocks is one of the most proven and effective strategies to beat the market over the long term. Dividends say a lot about the health of the business, if a company can sustain consistently growing dividends over the years, then it needs a solid and resilient business producing growing cash flows through all kinds of economic scenarios.
Unsurprisingly, investing in these kinds of companies tends to produce higher return and lower volatility over the years. According to data from Ned Davis Research, dividend growth companies produced an average annual return of 10% from 1972 to 2014, while annual volatility was around 16%. During that period, companies that did not pay a dividend delivered much smaller annual returns around 2.5%, while volatility was a considerably higher 25.2%.
Those looking to invest in a widely diversified portfolio of high-quality dividend growth stocks should look no further than Vanguard Dividend Appreciation ETF. The ETF invests in a basket of nearly 180 companies that have proved their financial strength by increasing their dividends in the past 10 years or more. This includes widely recognized names across different sectors, such Coca-Cola, Johnson & Johnson, and 3M. Like many ETFs from Vanguard, this vehicle has a conveniently low annual expense ratio — just 0.1%.