Ok, so maybe you are late to the ball game, or you have been fiercely investing your whole adult life but still feel like you don’t have enough, but want to protect what you do have. If your age starts with a -4-, you likely know what I am talking about. I recently wrote a piece discussing a few of my favorite Exchange Traded Funds geared for all investors. Now I am working through different age groups and pointing out some of my favorite ETFs that are more focused on each age group based on where investors are in their life cycle, their interests, and their investing temperament and goals.
Over the past few months, I began writing about different ETFs geared towards investors in different age groups. I have a piece for those in their 20's, a piece for those in their 30's, and today we are going to focus on ETF options for those in their 40's. One of the main difference between an investor in their 20's or 30's and someone in their 40's or older is 'time.' When you are young, you have all the time in the world, but as you get older, the time you have becomes more important.
So while a 20-year-old will and should take more risks with their investments, a 40-year-old needs to be slightly more conservative. But let's not forget you still have 20 years or more to save and give time for what you do have grow and then maybe another 30 years after that to live off your investment nest egg. So while you want to put a larger percentage of your money in safer bets, we don’t yet need to start a full-on conservation investment strategy.
With that information in mind, let's take a look at a few ETF's best suited for those in their 40's.
My first pick is iShares Edge MSCI USA Value Factor ETF (PACF:VLUE). This ETF is one of my favorites because it should protect you in bad times but allow you to profit in good times. VLUE invests in large and mid-cap U.S. stocks are undervalued by the rest of the market. The fund manager uses earnings, revenue, book value and cash earnings as metrics to determine undervalued equities. Currently, VLUE holds 147 stocks, has an expense ratio of just 0.15%, a dividend yield of 2.35%, weighted average market cap of the stocks it holds of $116.21 billion, and most importantly for a value ETF a price to earnings ratio of just 14.91, (I will not the current P/E ratio of the S&P 500 is 25.29 with the historical mean of 15.62).
With undervalued stocks, paying you a dividend, the only thing that could make VLUE any better is if it beat the market. Oh, wait it has! VLUE is up 5.53% over the last month, 12.25% over the last six months and 9.98% year-to-date, while the S&P 500 has risen 2.18%, 7.33% and 7.55% over the same timeframes.
For most young investors all they want is the next 'sexy' investment that they can brag about at their next party. But for the older, wiser investor they would rather brag about a dividend stock that pays a healthy yield and still increases in value alongside the major indexes. That kind of thinking is why the First Trust Morningstar Dividend Leaders Index Fund ETF (PACF:FDL) is a top ETF for anyone in their 40's. FDL decides which stocks to hold by first finding those that match a few rules such as a company has to be paying a higher dividend today than it was five years ago and its current yield must be lower than its forward earnings per share estimates. It then chooses the top 100 highest yielding firms, minus REITs, and weights them by the dollar value of their dividend payments. So, for example, AT&T Inc. (NYSE:T) is FDL's top holding, with Verizon Communications Inc. (NYSE:VZ), The Procter & Gamble Company (NYSE:PG), Pfizer Inc. (NYSE:PFE), and Philip Morris International, Inc. (NYSE:PM) rounding out the top five.
Again buying dividend stocks may not sound like the 'sexiest' thing, but FDL has risen 15.54% year-to-date and 11.34% over the last two years while the S&P 500 has only risen 7.55% year-to-date and 6.22% over the last two years. Market-beating returns like that plus a 2.98% dividend yield that is backed by some of the most financially sound companies available sounds really 'sexy' to me; but hey, I'm not 20 anymore.
And lastly, while you now have the dividend box checked and the value category covered, let's look for some growth. Here I have two options the iShares S&P 500 Growth ETF (PACF:IVW) or the Vanguard Mid-Cap Growth Index Fund (PACF:VOT). While both ETFs are geared towards growth, the iShares S&P 500 Growth ETF is only picking stocks from the S&P 500 (CME:SP500). This limits the fund's available growth picks to companies that are already rather large and have already gone through their true high growth days.
The Vanguard Mid-Cap Growth ETF is limited to only stocks that fall within the mid-cap range, so lower overall market caps. The Vanguard ETF is a little riskier because it is investing in smaller companies, but it could offer an investor a larger payoff if the success rate of the stocks within the fund is higher than the failure rate. Both ETFs will offer reasonable growth at reasonable risk ratings, but the Vanguard risk rating is slightly higher. The expense ratios are 0.08% for VOT while IVW will cost you 0.18%, but boast a 1.52% yield compared to just 0.82% for VOT. IVW also holds 317 stocks with the top 10 making up more than 30% of the portfolio while VOT holds just 153 stocks and the top 10 make up just 14% of the portfolio. So while VOT may hold riskier stocks, its weighting is more even, which helps reduce its risk.
Honestly, I would have a hard time deciding which one would be right for me and that’s why I have put both in my recommendation. I think your decision should be based on your individual situation when it comes to your other holdings. If you already own an S&P 500 index ETF, then doubling down on just S&P 500 stocks may not make sense, and the mid-cap focused ETF would make more sense, or vice versa if you already own a Russel 1000 or 2000 index ETF.
As always I hope this has given a little guidance or at the very least something for you to think about while you save for the long vacation known as retirement. Next month check back for the ETFs you should own when you're in your 50's and what to own once you hit retirement age.
Matt Thalman
INO.com Contributor - ETFs
Follow me on Twitter @mthalman5513
Disclosure: This contributor held long positions in Verizon and Procter and Gamble at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
If we were to use this strategy, would you recommend allocating all our funds to one ETF or dividing between the 3 ETF's.
I can't give you any personal advice, but I also lean towards diversity. While an ETF is already built to help give you diversity, you will still need a mix of investments in order to better protected yourself. But, if you are in your 40's, you still have a long time for your money to grow before retiring at say age 65. So you need some growth stocks. But, you don't want to put all your eggs in that growth basket because what if the market tanks again, so you should also own some safer dividend payers. Being 40 is difficult because you truly have to balance 50/50 between growing your portfolio and maintaining what you already have.
Hope this helps