Using ETFs in a Retirement Plan

Retirement is a goal for most everyone. For some, that goal is decades away. For others, the goal may be rapidly approaching. And then there are those for whom the goal has arrived, and who have entered the withdrawal phase of their financial lives.

Some professional investors say exchange-traded funds allow them to provide better retirement solutions for their clients than mutual funds traditionally have.

Morningstar's Christine Benz moderated a panel at the Morningstar ETF Conference addressing this topic. Panelists Will McGough from Stadion, Bob Smith from Sage Advisory, and Scott Kubie from CLS Investments agreed that ETFs allow them to more effectively manage risk.

"We have a greater degree of confidence in the risk we're taking with ETFs due to transparency," said Kubie.

ETFs also provide investors with access to markets that were heretofore unavailable, he noted. For instance, Kubie can now deliver currency-hedging strategies to clients thanks to ETFs.

Smith also praised the cost efficiency that ETFs bring to the table. Investors now have access to smaller and once cost-prohibitive pockets of the market, no matter their investment size. "ETFs are cost efficient and scalable for small accounts."

Kubie's experience has taught him that as investors near retirement, they're often looking for more customized solutions. As their account balances edge higher, some investors aren't "sleeping easy" with standard cookie-cutter asset mixes for their ages. In such cases, Kubie has used ETFs to advanced nuanced opportunities that may help investors manage risk or boost return as they near retirement.

Smith described the period of transitioning into retirement as "disjointed." McGough has employed some tactical strategies for clients moving into retirement. In particular, equity market volatility can be especially jarring for "transitionals." Kubie said rather than move nervous investors into cash, he'll shift a portion of their assets into low-volatility ETFs, to dampen some of the turbulence.

Once in retirement and tapping into their portfolios, investors can become income-obsessed. Investors like receiving regular checks in the mail and therefore often favor dividend-paying stocks. But what many retirees don't realize, argued Kubie, is that they are making a risk trade-off for income. They don't always understand the hidden interest-rate volatility and sector-specific risk they're courting with dividend stocks.

Yet the panelists acknowledge that low-yielding U.S. bonds aren't the most appealing alternatives. Rather that swapping overpriced bonds for overpriced dividend stocks, Kubie has mixed a blend of shorter, more cashlike ETFs with ETFs focusing on foreign dividend-paying stocks.