ETF Central (2024)

FAQs

How many ETFs should I own in retirement? ›

Experts agree that for most personal investors, a portfolio comprising 5 to 10 ETFs is perfect in terms of diversification.

Market risk

The single biggest risk in ETFs is market risk. Like a mutual fund or a closed-end fund, ETFs are only an investment vehicle—a wrapper for their underlying investment. So if you buy an S&P 500 ETF and the S&P 500 goes down 50%, nothing about how cheap, tax efficient, or transparent an ETF is will help you.

While the ETF has a history of high performance with an average five-year return of 16.46% and 11.70% over 10 years, management fees are on the higher end at . 4% per annum.

The 4% rule says people should withdraw 4% of their retirement funds in the first year after retiring and take that dollar amount, adjusted for inflation, every year after. The rule seeks to establish a steady and safe income stream that will meet a retiree's current and future financial needs.

In your later years, a conservative allocation of 30% cash, 20% bonds and 50% stocks might be appropriate. Diversified portfolios typically include a core of at least 50% stocks in part because equities alone offer the potential to generate long-term returns exceeding inflation.

Q: How does the wash sale rule work? If you sell a security at a loss and buy the same or a substantially identical security within 30 calendar days before or after the sale, you won't be able to take a loss for that security on your current-year tax return.

Buying high and selling low

At any given time, the spread on an ETF may be high, and the market price of shares may not correspond to the intraday value of the underlying securities. Those are not good times to transact business.

Holding an ETF for longer than a year may get you a more favorable capital gains tax rate when you sell your investment.

What is the safest ETF? ›

Indexed ETFs, tracking specific indexes like the S&P 500, are generally safe and tend to gain value over time. Leveraged ETFs can be used to amplify returns, but they can be riskier due to increased volatility.

"A newer investor with a modest portfolio may like the ease at which to acquire ETFs (trades like an equity) and the low-cost aspect of the investment. ETFs can provide an easy way to be diversified and as such, the investor may want to have 75% or more of the portfolio in ETFs."

You expose your portfolio to much higher risk with sector ETFs, so you should use them sparingly, but investing 5% to 10% of your total portfolio assets may be appropriate. If you want to be highly conservative, don't use these at all.

One is enough, but you're probably getting too many when you're getting above 5 or 6 because it's just like you covered all the major geographies of the world. And then when it comes to your satellite, you know, you could have 20 thematic ETFs and active ETFs if you wanted to.

The majority of individual investors should, however, seek to hold 5 to 10 ETFs that are diverse in terms of asset classes, regions, and other factors. Investors can diversify their investment portfolio across several industries and asset classes while maintaining simplicity by buying 5 to 10 ETFs.

Generally speaking, fewer than 10 ETFs are likely enough to diversify your portfolio, but this will vary depending on your financial goals, ranging from retirement savings to income generation.

With the power of diversification and flexibility, ETFs can help you effectively manage risk in your retirement plan while aiming for growth and income.