Investors over the age of 70 are more likely to own exchange traded funds than Generation X or Baby Boomer investors, according to a survey from BlackRock. Within that age group, 37% of respondents said they owned an ETF, a higher proportion than both Gen X investors, 29% of whom own ETFs, and Boomers (27%).
“Older adults’ embrace of ETFs may have something to do with the fact that, as retirement approaches, many investors look at their portfolios with a fresh set of eyes and make adjustments accordingly,” wrote Christine Benz at Morningstar, who cited five reasons why index funds and ETFs are attractive additions to retirement portfolios.
They Make Cash Flow Extraction Easy
Retired investors can extract cash for living expenses from their portfolios through either an income-centric approach, a total return/rebalancing approach, or a combination of the two. Index funds and ETFs make either approach easy.
For income-centric retirees, the low fees that index funds and ETFs levy ensure that more of their dividends flow through to shareholders. For total-return-oriented retirees using rebalancing to meet living expenses, index funds and ETFs are typically pure plays on a given asset class. That makes it easy to identify which assets need to be scaled back to deliver the retiree’s desired cash flow and restore the portfolio to its desired asset allocation mix.
Maintaining Them Is a Breeze
Index funds and ETFs also limit retirees’ oversight obligations. While retirees using index funds need to keep tabs on their portfolios’ asset allocation mixes, most core index funds and ETFs change very little on an ongoing basis. Plus, expense ratios are also generally stable. And because index funds don’t make active bets, investors employing total market index products won’t find their total portfolios listing toward a single sector.
It's Easy to Control Portfolios’ Risk Levels
Most retirees value risk controls. While good active funds have reduced their losses in tough times, there are also many lower-risk index products that have managed downside volatility. Some low-volatility index products can also play good defense.
The Tax Efficiency Stakes May Be Higher
Taxes are another area where the advantage accrues to index funds and ETFs in retirement. Equity index funds and ETFs are tax-efficient relative to their actively managed counterparts.
Managing for tax efficiency is important in retirement because investors’ portfolios are often at their largest right before and during retirement. Plus, controlling taxable income in retirement may also reduce the extent to which Social Security income is taxed and reduce susceptibility to Medicare premium surcharges.
Lower-Return Portfolios Demand Low-Cost Products
In retirement, low-cost products make sense, since holding more cash and bonds tends to lower a portfolio’s return potential. Keeping expenses low ensures that a higher share of the returns flows to the investor.
Nationwide offers a variety of actively managed ETFs for advisors that cater to a range of investment exposures and strategies for those seeking retirement income options for their clients as part of their bigger retirement planning pictures.
For more news, information, and strategy, visit the Retirement Income Channel.
