Exchange-traded funds, or ETFs, are more than up and comers in the investment world. Now a nearly $3 trillion business, you rarely find them in retirement plans. That doesn’t make sense to me.
It’s not that ETFs are bad vehicles for IRAs, 401(k)s and 403(b)s. On the contrary: They offer incredibly low costs, diversification and transparency. They are ideal for retirement savers.
Yet, as Beth Pinsker reports for Reuters, ETFs are scarce in retirement programs.
"Of the $5 trillion in assets in company-sponsored 401(k) plans," Pinsker reports, "two-thirds are held in mutual funds, the ICI says. ETF assets, meanwhile, are a mere fraction of the pool left over, with the exact percentage not tracked publicly."
ETFs are neglected even though they offer tax efficiency, package stocks and bonds and show you their holdings every day while being traded on stock exchanges. Although they have been difficult to offer in 401(k)s, those obstacles have been largely overcome.
Could it be that ETFs don’t make much, if any, money for middlemen? That’s my theory. The most popular ETFs are commission free and charge little in the way of fees. And there are more than 2,000 to choose from, so it’s not that they are hard to find.
But the savings advantage of ETFs is undeniable. You can find them costing as low as 0.03% annually for annual expenses. That’s about as low as you can go for a basket of stocks like the Schwab U.S. Broad Market (SCHB), Large-Cap (SCHX) and iShares Core S&P U.S. Stock Market (ITOT) ETFs.
Considering that the average stock mutual fund charges around 0.80% a year — bond funds average 0.51% — and you’re getting a bargain-basement deal in an ETF. And that translates into saving much more for retirement.
Here are five reasons you should have ETFs in your retirement vehicles.
— They are really cheap. The less money you pay middlemen, the more you can save for retirement.
— They are easy to understand. They can bundle stocks, bonds and pieces of real estate. Most of them are index funds, meaning they passively hold large swaths of the stock and bond markets.
— They are diversified. You can hold most large global stocks and bonds in one package.
— They are open books. Unlike mutual funds, which give you a snapshot of their holdings quarterly, you know what’s in ETFs every day.
— You can hedge with them. Want to bet against a market? You can buy an "inverse" ETF to make money if a particular market goes down.
Want ETFs in your retirement plan? If shopping on your own, you can choose from an array of funds from all of the major mutual fund groups such as iShares, State Street (SPDRs), Schwab and Vanguard.
How do you approach your employer? Ask them to bid out the plan fund managers and consider ETF offerings. It’s that simple. Their savings will be your savings.