Retirement ETF choices include SPY, SCHD, and ILTB

Many investors make what I consider to be a sad mistake. They think they should increase their bond holdings, bond funds, and cash holdings as they get older. Today’s post might help you reconsider this common financial industry “logic.” I picked three ETFs to help illustrate the potential downside of picking bonds over stocks.

How about SPY?

SPY is (SPY SPDR S&P 500 Trust ETF) is a reputable low-expense fund focused on the S&P 500. As such, it holds 507 positions and has an excellent expense ratio of 0.09%. The current yield on this fund is a paltry 1.23%. But there is another rub. In the top ten holdings, because the ETF is cap-weighted (not equal-weighted), there is 6.84% exposure to Apple (AAPL), 6.24% exposure to Microsoft (MSFT), and 3.59% exposure to Amazon (AMZN). In other words, three stocks make up 16.7% of the total. This means that a market downturn could brutally reduce the value of SPY. Of course, the opposite is also true. If investors continue to love AAPL, MSFT, and AMZN, SPY will do quite well. SPY also has decent diversification.

How about SCHD?

SCHD (Schwab Strategic Trust – Schwab U.S. Dividend Equity ETF) is an ETF that currently holds 105 positions. The top three investments are Pfizer (PFE) 4.41%, Broadcom (AVGO) 4.34%, and Cisco (CSCO) 4.2%. In other words, like SPY, there is risk if any or all of the positions take a dive. A key difference, however, is that the yield is currently 2.75%. For someone in retirement, I view quarterly dividends as an acceptable trade-off to holding the S&P 500. If you are able to live off of the dividend, then you probably won’t have to sell your shares to get cash for expenses, giving, or big purchases. Of course, this presumes that you have a budget and have a good nest egg to provide good dividend income.

How about ILTB?

ILTB (iShares Core Long-Term U.S. Bond ETF) is a low-expense fund focused on US Treasury Bonds. It holds 2,360 positions. Many would consider this to be a “safe” investment. The expense ratio is 0.06%. The ten-year return, not surprisingly, is 16.51%. If you bought this fund ten years ago, inflation is killing you. The fund is down almost 6% in the most recent 12 months. Investors might like it because it yields 3.15% and it pays monthly. For those who want monthly income, I can see why some might pick this ETF. That is a mistake, in my opinion.


I certainly don’t dislike SPY. It is a rational choice for some of your investing dollars. However, in retirement, SCHD may be a better choice, along with some dollars in other dividend-growth ETFs like DGRO and VYM. ILTB, and similar bond funds, are a slow death for any investor who might live another ten years or more.

Full Disclosure

Cindie and I own 750 shares of SCHD as a long-term investment. This is far less than our investment in another good ETF: VYM. However, I do sell covered calls on SCHD, so 300 of those shares might be called away on January 21.