Tips regarding ETFs for senior investors

Exchange-traded funds, otherwise known as ETFs, are smart investment picks for many reasons, including portfolio diversification, their lower risk and transparency.

Senior investors who are seeking diversification in their portfolio may want to consider exchange-traded funds.

"An ETF is a pooled investment vehicle with shares that investors can buy and sell throughout the day on a stock exchange at a market-determined price," says Harman Johal, a wealth management market leader for Texas and Illinois at U.S. Bank in Houston.

Johal explains that ETFs are primarily passive investments that seek to replicate the performance of a particular index.

"ETFs have gained popularity in the last decade among institutional and individual investors and have grown to hold more than $3.4 trillion in assets in the last 25 years," Johal tells FOX Business. "Since ETFs are primarily passive, this results in lower expense ratios compared to actively managed funds. Some ETFs charge less than 0.05%, and that’s a sizable advantage over actively managed funds that charge an average of over 0.50%."

To that end, he says that passive ETFs are also tax efficient as they track an index and do not require frequent trading, which helps to minimize the capital gains they have to distribute.

Johal says that according to Investment Company Institute research, a commonly cited goal with 76% of ETF households was retirement. Additional research by BlackRock found that among investors over the age of 70, 30% said they owned an ETF, he says.

"ETFs can provide cost-effective options for investors who are nearing retirement and are looking to change their portfolios from growth-oriented ones to portfolios that can provide a balance of growth and income," Johal says.

Specifically, he explains that cost efficiency is an important consideration for senior investors, as the returns on their portfolios will potentially be low, as they are shifting from a growth strategy to an income strategy.

"Keeping expenses low helps ensure that a higher percentage of the returns goes to the investor," continues Johal.

Furthermore, Johal explains how ETFs tend to have an advantage over actively managed funds in terms of tax efficiency, low cost, low investment minimums and transparency of holdings within an ETF. Inherent market volatility risks still exist with ETF investing.

"Other areas that investors need to be aware of investing in ETFs is that some ETFs may have a wider bid/ask spread, and some specialty asset class ETFs may be difficult to sell exactly when the investor wants to," he adds.

According to Johal, retirees can consider three different strategies to produce income from ETFs: Dividend-paying equity ETFs, bond fund ETFs and real estate investment trust ETFs.

Roxanna Islam, associate director of research with VettaFi, says retirees looking for income generation can invest in dividend ETFs and other income ETFs which can provide regular income distributions while reducing single stock risk.

"Senior investors can also hold these ETFs longer term and expect a relatively stable yield due to diversification benefits without the need to manually buy and sell stocks in anticipation of dividend changes," Islam says.

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