ETF (Exchange Traded Fund) would be a good choice for retirement financial planning.
The main advantage is that you are free from the risk of having to bet on individual companies or stock and be able to create an all-weather portfolio. You can choose which index to track, that is, you will know which major market, industry or theme the ETF to invest in.
There are 5 points you should note and consider when buying ETF for retirement:
1. Tracked assets
To understand what asset returns an ETF tracks, it can be an index or a commodity price. In addition, it should be noted that the traditional ETF is passive management, that is, it will only be combined with the index, but in recent years, it has also been actively managed.
I would always go with index funds simply because the fees are much lower (usually under 0.1%) and the results are better than those actively managed.
2. Types of tracking
There are three ways to track returns:
a. Fully replicated strategy: The fund manager will invest in the index stocks in accordance with the proportion of the tracking index constituents to obtain returns. The advantage is that they can keep track of the changes in the index. The disadvantage is the higher cost and transaction costs.
b. Representative sampling replication strategy: The fund manager will construct a portfolio with returns, risks, and investment characteristics similar to the tracking index by extracting the most representative stocks. This method is more common for tracking a large number of constituent stock indexes. Benefits It is relatively cheaper than “full copy”. The disadvantage is that it is not as close to the index as “full copy”, and there is a certain degree of tracking error.
c. Synthetic replication strategy: Fund managers use SWAP and / or derivatives to achieve low-cost and track performance without necessarily holding component stocks directly. This method can also closely track the performance of the index, but the counterparty risk, valuation risk, and liquidity risk are higher than the first two. Synthetic ETFs are identified by an “X” before the stock short name.
3. Fees
The average fee ratio is 1.4% which, to me, is quite high and would definitely have an impact on the actual return (especially if the fund that you choose produces only 3–4% a year). And over a period of years, the fees could accumulate to an unexpected level (which could be millions of dollars we are talking about here). As such, I would as much as possible go for funds that are lower in fees (say 0.8 or less than 1%).
4. Distribution
Return is almost the no. 1 thing that we know at when we consider making any investment. Nonetheless, if we are investing for retirement, we should place a higher priority for the frequency of the distribution. Monthly income is what we want for retirement. While most of the funds’ distribution is quarterly or annually, building a portfolio with monthly distribution should always be our goal and strategy.
We can go for a mix of quarterly and monthly distribution or choose various funds that distribute quarterly in different months so that taking the portfolio as a whole we can have a monthly income.
5. Trading activity
As a rule of thumb, the more active the trading, the narrower the bid-ask spread, and the better the liquidity. In case you need to liquidate your investment anytime, if there are two similar funds that I am considering, I would always go for the one with high trading activity.
Note: this is not investment advice. I’m not financial planning professional. Just sharing what is working for me as part of my investing strategy or what I have learned on my investment journey. Please be reminded to do your own research and consider your own circumstances before making any financial decisions. You could also check with your financial professional to understand what would be best for your situation.
