In the past, retirees invested quite differently. Often, a retirement portfolio consisted of blue-chip stocks and bonds managed by a financial advisor, or of expensive, actively managed mutual funds.
This changed in 1976 when John Bogle and Vanguard launched the First Index Investment Trust, a low-cost passive mutual fund tracking the S&P 500. Coupled with Vanguard’s first money market fund launched the year prior, retirees could now invest with lower costs and much greater diversification.
The launch of the First Index Investment Trust provided a runway for the launch of numerous low-cost Vanguard index funds in the ensuing years, tracking everything from the total U.S. stock market to small-cap stocks, and ultimately bonds, by 1986.
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In 2001, Vanguard made another bold move by launching exchange-traded fund, or ETF, shares of its existing index fund lineup. For retirees, this development meant greater tax efficiency, better liquidity and access to a wider range of asset classes.
“Our firm prefers ETFs since they generally have lower fees than mutual funds, making them a cost-effective option for retirement investing,” says Sean August, CEO at The August Wealth Management Group. “Additionally, ETFs tend to be more tax efficient than mutual funds, thanks to their ability to potentially minimize capital gains taxes.”
Today, Vanguard’s ETF lineup spans 82 funds, covering stocks from multiple geographies, market-cap sizes and sectors. Most of these ETFs are passively managed, boast low expense ratios and incur minimal turnover, making them great for budget-conscious retirees.
Here’s a look at eight of the best Vanguard ETFs for retirees looking to focus on a combination of capital preservation and steady income:
| Vanguard ETF | Inception Date | Annualized Return Since Inception |
| Vanguard Total Stock Market ETF (ticker: VTI) | 5/24/2001 | 7.8% |
| Vanguard Total International Stock ETF (VXUS) | 1/26/2011 | 3.9% |
| Vanguard Total World Stock ETF (VT) | 6/24/2008 | 6.6% |
| Vanguard High Dividend Yield ETF (VYM) | 11/10/2006 | 8% |
| Vanguard Ultra-Short Bond ETF (VUSB) | 4/5/2021 | 0.7% |
| Vanguard Short-Term Treasury ETF (VGSH) | 11/19/2009 | 0.8% |
| Vanguard Short-Term Inflation-Protected Securities ETF (VTIP) | 10/12/2012 | 1.5% |
| Vanguard Tax-Exempt Bond ETF (VTEB) | 8/21/2015 | 2.1% |
Vanguard Total Stock Market ETF (VTI)
The core of most investment portfolios, whether optimized for growth or retirement, is usually an allocation to equities. While higher risk and more volatile than bonds, equities can provide strong growth potential, which is critical for ensuring a safe withdrawal rate in retirement. To balance risk and return, many retirees will include a lower allocation to equities in their portfolio relative to bonds.
A popular pick for a domestic equity allocation is VTI. “VTI is a good option for broad-market U.S. equity exposure because it tracks the CRSP US Total Market Index, which includes small-, mid- and large-cap stocks,” August says.
By buying VTI, retirees are placing their faith in the overall U.S. economy as opposed to a particular sector or market-cap size. VTI charges a low expense ratio of 0.03%, which works out to $3 a year on a $10,000 investment.
Vanguard Total International Stock ETF (VXUS)
The risk of only holding VTI is the chance of the U.S. stock market faltering for an extended period of time. For retirees relying on portfolio withdrawals to fund living expenses, this can be disastrous. To offset this, retirees may consider diversifying their equity allocation globally to countries like the U.K., Canada, France, Germany, China, Australia and Japan, to name a few.
A low-cost way of indexing the international ex-U.S. market is via VXUS. “This ETF invests in a mix of international-developed and emerging markets, which provides exposure to market-cap-weighted companies outside of the U.S.,” August says.
Currently VXUS sports very high diversification with nearly 8,000 stocks. The ETF charges a 0.07% expense ratio.
Vanguard Total World Stock ETF (VT)
For retirees who want maximum simplicity, VT offers a great alternative to a combination of VTI and VXUS. As its name suggests, VT invests in the global stock market. The ETF is benchmarked to the FTSE Global All Cap Index, which currently holds more than 9,500 market-cap-weighted stocks from U.S., international-developed and emerging markets. All this comes in at a low 0.07% expense ratio.
The main benefit of an all-in-one equity ETF like VT is peace of mind. While VT is still quite volatile, retirees no longer need to worry about predicting which geographies or sectors are expected to perform better. For example, North American stocks currently make up 62% of VT, but if this changes in the future and, say, emerging markets take off, VT’s market-cap-weighted index will adjust accordingly.
[READ: 7 Best Emerging-Market ETFs]
Vanguard High Dividend Yield ETF (VYM)
Some retirees favor dividend ETFs thanks to favorable taxation on their distributions as well as the ability to fund withdrawals without having to sell shares. A potential pick from Vanguard is VYM, which tracks the FTSE High Dividend Yield Index. This ETF currently holds 465 U.S. companies that have paid above-average dividends for the previous 12 months and excludes real estate investment trusts, or REITs.
Compared to the benchmark S&P 500, VYM’s portfolio has more of a large-cap value focus and a greater emphasis on the financial, energy, utilities and consumer staples sectors. This is mostly due to the greater proportion of dividend-paying stocks found in those sectors. Currently, VYM pays a 30-day SEC yield of 3.1% and charges a 0.06% expense ratio.
Vanguard Ultra-Short Bond ETF (VUSB)
“Vanguard also offers a range of ETFs that invest in short-term, high-quality and lower-risk fixed-income assets,” August says. “These ETFs can be used as a cash equivalent to provide liquidity and preserve capital.”
A great example is VUSB, which is actively managed to maintain an average maturity of zero to two years, which can greatly minimize sensitivity to interest rate changes. The majority of VUSB is held in money market instruments and short-term, high-quality bonds, which include asset-backed bonds, government Treasurys and investment-grade corporate bonds.
Currently, VUSB is paying out a yield to maturity of 5.5%, which is the theoretical return an investor could expect if all of VUSB’s underlying bonds were held to maturity. The ETF charges a 0.1% expense ratio.
Vanguard Short-Term Treasury ETF (VGSH)
VUSB contains a higher-than-average allocation to investment-grade corporate bonds. While these assets can increase yields, they also come with a higher degree of credit risk. When markets and economic conditions take a downturn, the credit ratings of many companies can be called into question, potentially leading to losses in the price of their issued bonds.
To remedy this, retirees can buy VGSH, which only holds U.S. government Treasurys that are considered “risk free” in terms of default. With an average duration of 1.9 years, VGSH is only expected to lose 1.9% if interest rates rise by 100 basis points, all else being equal. This makes VGSH a fairly resilient ETF when interest rates rise. VGSH currently pays a yield to maturity of 4.1% against a 0.04% expense ratio.
Vanguard Short-Term Inflation-Protected Securities ETF (VTIP)
“If a retiree’s asset allocation only holds 30% equities or less, then adding an ETF like VTIP can help protect against unexpected inflation and preserve purchasing power,” says Nilay Gandhi, senior wealth advisor at Vanguard. This ETF holds Treasury inflation-protected securities, or TIPS, which are bonds that have their value indexed to changes in the consumer price index.
Compared to nominal bonds, TIPS tend to prove more resilient during times of sudden inflationary pressures. By adding an ETF like VTIP to an existing bond allocation, retirees can gain the benefits of inflation protection without sacrificing diversification. Currently, VTIP pays a yield to maturity of 4% against an average duration of 2.4 years. The ETF charges a 0.04% expense ratio.
Vanguard Tax-Exempt Bond ETF (VTEB)
Retirees with a large portfolio can enjoy the benefits of higher income streams, but this can come at the cost of greater taxation on investment income. “A potential solution is an ETF like VTEB, which provides broad U.S. municipal bond exposure suitable for retirees in a higher marginal tax bracket,” Gandhi says. Like many of Vanguard’s ETFs, VTEB comes in cheap at a 0.05% expense ratio.
By tracking the Standard & Poor’s National AMT-Free Municipal Bond Index, VTEB is able to produce income that’s exempt from both federal income taxes and the federal alternative minimum tax. This makes the ETF a great alternative to traditional core bond ETFs in a taxable account. VTEB currently pays a yield to maturity of 3.2% and possesses an average duration of 5.5 years.
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8 of the Best Vanguard ETFs for Retirees originally appeared on usnews.com
Update 05/12/23: This story was published at an earlier date and has been updated with new information.
