Best ETFs for 401k Investments for a Secure Future

If you're looking to secure your financial future through a 401k, one of the best ways to do so is by investing in the right ETFs. A well-chosen ETF can provide broad diversification, reduce risk, and increase potential returns.

For a secure future, it's essential to consider low-cost index funds and ETFs that track the overall market, such as the Vanguard Total Stock Market ETF (VTI). This ETF provides exposure to nearly 100% of the US stock market.

The Schwab U.S. Broad Market ETF (SCHB) is another excellent option for a 401k, offering a low-cost and diversified portfolio of US stocks. With a low expense ratio of 0.03%, it's an affordable choice for long-term investors.

Investing in a mix of domestic and international ETFs can also help spread risk and increase potential returns.

ETFs offer a range of advantages for 401(k) plans, including low expense ratios and intraday trading. This can be beneficial for participants who want to diversify their investments within their 401(k) plan.

However, ETFs aren't as common in 401(k)s as mutual funds, which are more familiar to participants. Plan sponsors aim to deter excessive trading behavior and market timing by incorporating ETFs in their plans.

ETFs introduce complexities in record-keeping and may require different operational processes within 401(k) plans. This can be a challenge for plan sponsors who are used to managing mutual funds.

There are generally two types of ETFs: passively managed and actively managed funds. Many ETFs are passively managed because they track an index or benchmark, which keeps activity—and thus costs—from the fund managers to a minimum.

Passively managed ETFs offer tax advantages because there is less trading activity within the fund. Minimal activity means there are fewer capital gains events triggered, which directly affect the fund's profitability.

The Vanguard Russell 3000 ETF (VTHR) is an example of a passively managed ETF with an expense ratio of 0.10%. This is lower than the expense ratio of actively managed Vanguard U.S. Minimum Volatility ETF (VFMV) at 0.13%.

ETFs have been gaining in popularity since they were first introduced, so there is a demand for them. As many as 70 million people participated in 401(k) plans as of Dec. 31, 2023.

Here are some key statistics about ETFs in 401(k)s:

Plan sponsors can offer ETFs as managed accounts, which might be offered instead of target date funds. However, it would still be up to the plan sponsor to vet these accounts and ensure they are appropriate for their participants.

For retirement investors, it's essential to choose the right ETFs for their 401k. Vanguard ETFs are a popular choice due to their low fees, understandable strategies, and wide range of options.

One of the key benefits of Vanguard ETFs is their low expense ratio, which can add up to tens of thousands of dollars over time. For example, the difference between an expense ratio of 0.03% and 0.05% can add up to tens of thousands of dollars over 40 or 50 years.

Here are some top Vanguard ETF picks for different types of retirement investors:

Consider the VIG ETF, which holds 150 stocks that regularly raise their dividends and has a 30-day SEC yield of 1.7%. This fund is suitable for intermediate investment timelines and retirement income seekers.

The investment strategy you choose should evolve as you get older. As a young investor in your 20s or 30s, you can take on more risk and volatility in pursuit of capital appreciation. You won't need your retirement capital for decades, so current market fluctuations aren't a major concern.

Retirement investors in their middle years should start building some defense into their strategy. A greater emphasis on income-producing assets can help shield against market volatility going forward. This can provide a smoother ride during market downturns.

As your career winds down, capital preservation becomes the top priority. Aggressive equities are less suitable in this phase, and increased exposure to low-volatility stocks and bonds can provide a good balance of upside and stability.

Growth VUG is a top choice for investors with longer investment timelines and moderate risk tolerance. It invests in about 200 large-cap U.S. growth stocks like Microsoft, Apple, Nvidia, and Amazon.

The fund's expense ratio is 0.04%, making it a cost-effective option. Its inception date was 2004, and it has an average annual return since inception of 11.2%. The fund is best suited for young or risk-tolerant retirement investors.

VUG makes this list of top ETFs because it provides convenient access to the largest growth stocks in the U.S. These have solid appreciation potential plus the size and scale to manage through economic downturns.

Here are some key stats about VUG:

You can access various asset classes through ETFs in your 401(k), including domestic and international stocks, bonds, real estate investment trusts (REITs), commodities, and more.

ETFs are investment vehicles that allow 401(k) participants to invest in a diversified portfolio of assets.

With thousands of ETFs available, what's available to you depends on your plan's offerings.

Vanguard ETFs are a popular choice for retirement investors due to their low fees and wide range of choices.

Investing in stocks can be a riskier way to invest, but it's also the way to potentially earn higher returns.

A 7% return on a 401(k) investment can turn $10,000 into over $75,000 in 30 years, even with no further contributions.

You should spread out your risk by investing in a mix of assets, also known as asset allocation.

The risk of holding cash is actually greater than investing in the stock market, as uninvested money can lose value over time due to inflation.

Investors with decades to save should take on more risk earlier on and dial it back as retirement approaches.

A rule of thumb is to subtract your age from 110 or 100 to find the percentage of your portfolio that should be invested in equities, with the rest in bonds.

You can access various asset classes through ETFs in your 401(k), including domestic and international stocks, bonds, real estate investment trusts (REITs), commodities, and more. There are thousands of ETFs, but what is available to you depends on your plan's offerings.

ETFs can provide diversification, which is a key benefit of investing in a 401(k). For example, VEU invests in over 2,000 large-cap stocks from 46 developed and emerging markets outside the U.S.

You can also access domestic stocks through ETFs, such as VUG, which invests in about 200 large-cap U.S. growth stocks like Microsoft, Apple, Nvidia, and Amazon. Another option is VOO, which owns all stocks in the S&P 500, including Microsoft, Apple, Nvidia, and Amazon.

International exposure can provide access to fast-growing markets around the world and reduce dependence on the U.S. financial markets. VEU is a top choice for international exposure, providing 30% international exposure in a long-term stock portfolio may contribute to lower overall volatility.

Here are some examples of ETFs that offer access to different asset classes:

Keep in mind that the availability of these ETFs will depend on your 401(k) plan's offerings.

VXF is a top choice for investors looking to tap into the growth potential of smaller companies. It offers diversification through a portfolio of thousands of individual stocks, reducing the risk of being dependent on any one company.

One of the key benefits of VXF is its ability to provide exposure to up-and-coming companies without the unpredictability of individual small- and mid-cap stocks.

VXF's diversified portfolio makes it an attractive option for investors seeking to balance risk and potential return.

The VXF portfolio is made up of thousands of individual stocks, giving investors a broad range of options to choose from.

Here are some key stats about VXF:

Investors should consider VXF as part of a diversified portfolio to capture the growth potential of smaller companies.

The total bond market is a great place to start for retirement investors. This type of investment provides stability and income, making it a perfect complement to equity funds.

Younger retirement investors may only need a 10% bond allocation, but as retirement nears, it's recommended to shift to higher bond allocations for lower overall volatility.

Low fees are especially important for long-term investments like retirement portfolios. Over 40 or 50 years, the difference between an expense ratio of 0.03% and 0.05% can add up to tens of thousands of dollars.

Investors can consider Vanguard ETFs, which have low fees and a wide range of choices. This is especially beneficial for retirement investors who need to keep their costs low over a long period of time.

ETFs offer several advantages, including low expense ratios and intraday trading capabilities, which can be beneficial for investors.

ETFs can be traded intraday, allowing investors to buy and sell shares throughout the day. This can help them take advantage of market fluctuations.

However, intraday trading can also encourage excessive trading behavior and market timing, which plan sponsors often aim to deter.

ETFs introduce complexities in record-keeping and may require different operational processes within 401(k) plans.

In fact, ETFs aren't as common in 401(k)s as mutual funds, which are more familiar to participants and have several benefits.

More 401(k) plans are beginning to incorporate ETFs to provide additional investment choices as ETFs grow in popularity and participant preferences change.