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With their low fees and exposure to a wide range of holdings, exchange-traded funds (ETFs) are a good option for many investors. But which funds? That depends on your stage in the journey to retirement.

“ETFs are an incredibly powerful tool that investors at any age can use to customize their portfolios and fine-tune their strategies,” says Daniel Straus, vice-president of ETFs and financial products research at National Bank Financial Inc. in Toronto. "But it’s important to get the right one.”

Issues to consider in ETF selection include your tax scenario, net wealth, earning potential, income from other sources, personality profile and asset allocation, he says.

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Traders work on the floor of the New York Stock Exchange.


The general rule of thumb for investing – greater risk exposure in exchange for higher potential returns for those with longer time horizons – applies here, says Mark Raes, head of ETF business development at BMO Global Asset Management.

“Investors need to keep their investments working for them, but with a level of risk where they can be comfortable,” says Mr. Raes.

Here are ETF suggestions for different ages and stages.

Beginners, investors in their 20s

Young investors “can withstand market cycles as they build their wealth, as they have a long-term investing horizon,” Mr. Raes points out. Beginners should be in high-risk, high-return ETFs, but you need to be able to stomach that risk, he cautions.

Investors in their 20s who have no immediate need for cash should be in an all-equity fund like the Vanguard Total World Stock ETF (VT), which trades in the United States but is globally diversified, says David Kletz, a portfolio manager with Forstrong Global Asset Management in Toronto. Large, liquid and low-cost, it covers all of the world’s equity markets.

The iShares Core MSCI All Country Ex Canada ETF (XAW) provides exposure to almost every stock market around the globe, Mr. Straus says. One of the countries that’s missing is Canada, he notes, but as investing newbies “accumulate assets over their investment horizon, they can add other Canadian equity positions, either via ETFs or stocks directly.”

ETFs composed of 100-per-cent stocks “could be vulnerable to stomach-churning draw-downs as high as 50 per cent, as we saw during the global financial crisis” of 2008-2009, he warns. “This is part of the risk investors must face in order to benefit from the high growth levels that global equity investing has to offer.”

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Mid-term, investors in their 40s

Vanguard’s suite of three “asset allocation portfolio” ETFs are turning heads as one-stop investing solutions, Mr. Kletz says.

Mid-term investors might consider the most growth-oriented of those Vanguard funds, the Vanguard Growth ETF Portfolio (VGRO), which has an 80/20 stock/bond ratio, says Mr. Straus.

The Vanguard Balanced ETF Portfolio (VBAL) could also work for this stage, and its 60/40 ratio is a more mainstream choice, he suggests. “However, today’s 40-year-olds are facing potentially longer periods of longevity and older retirement ages, which means that an 80/20 asset allocation might still be appropriate.”

Keith Richards, president and chief portfolio manager at ValueTrend Wealth Management in Barrie, Ont., says mid-term investors might consider the SPDR S&P 500 ETF (SPY), which is among the largest ETFs in the world. “It’s just the S&P 500, and it’s going to do whatever that index does, it’s not magic,” says Mr. Richards. He notes that the fund’s minimal management keeps the fee low, and “I’m a big believer in the U.S. market, and the S&P is the way to go.”

Nearing retirement, investors in their 50s and 60s

Investors in this category should reduce risk, but they need to keep their money working.

The Invesco Low Volatility Portfolio ETF (PLV) is a multi-asset ETF that doesn’t hold traditional “market-cap-weighted” passive-index ETFs for its equity positions, Mr. Straus says. Instead, it holds a subset of stocks that show fewer day-to-day price movements, providing a buffer in a downturn. The other 30 per cent of the portfolio is invested in short-term bonds, which can do better than broad aggregate bonds in a rising-interest-rate environment.

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Mr. Richards likes the Horizons Seasonal Rotation ETF (HAC) for anyone up to their mid-60s because “everyone wants some growth.” He notes that this ETF has steady returns and keeps volatility low by following seasonal patterns and technical indicators.

It’s important to select dividend-paying companies that are growing rather than aging; the latter could suffer under rising interest rates, Mr. Raes says. The BMO US Dividend ETF CAD (ZDY) holds industry leaders such as Pfizer Inc., Target Corp. and Procter & Gamble Co., which have strong underlying financials and good dividend-payout ratios.

Post-retirement, investors in their 70s

In this category, investor goals crystallize around capital preservation and consistent income generation. A pure fixed-income ETF might be a “safe and solid” choice, says Mr. Raes.

But to generate higher yields, ETF providers offer a variety of income-themed, multi-asset portfolios that dip into other asset classes and strategies such as dividend stocks and covered call overwriting, a technique that allows returns to be locked in.

A unique approach for post-retirement investors looking to protect their nest egg is the BMO US High Dividend Covered Call ETF (ZWH), Mr. Straus suggests. It enhances income by writing call options on a more concentrated dividend portfolio, offering more income protection as well as lowering risk.

Mr. Kletz likes the Vanguard Conservative ETF Portfolio (VCNS), which has a 40/60 stock/bond ratio and a “full portfolio diversified globally across asset classes for a low fee.” It offers retirees decent growth potential as well as a reasonable level of volatility, he says.

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