There is a growing movement out there that want to retire early with exchange-traded funds (ETFs).
That doesn’t just mean retiring a year early, some people are aiming to retire in their 40s or even 30s. If you’re looking to retire early, or just become financially independent, then ETFs can be a great way to do it.
Obviously the first step to retire early is that you need to get your household budget where you can regularly invest into ETFs. If you’re going to achieve something that not many people do, you need to do things differently with your finances to make it work.
Why ETFs are great for retiring early
It’s very easy to invest with ETFs. It takes very little time to analyse ETFs too, you don’t need to run a DCF. That leaves you much more time to earn more money or have fun.
ETFs make great buy-and-hold investments because they usually provide good diversification. The good ETFs usually give you exposure to dozens, hundreds or thousands of different businesses.
They also usually come with lower management fees, meaning there’s more net returns for your portfolio – bringing you to early retirement quicker.
In-fact, studies show that a lot of fund managers underperform the market over the short-term and long-term, particularly after fees. That’s not the case with every fund manager, but it does show that a lot of people may have been better off simply by investing in a diverse, low-cost ETF.
Which ETFs are good investments?
I think there are two types of ETFs that are worth investing in. The first group are extremely diverse ETFs that offer global earnings diversification. It would be possible to just own one of the following group and achieve excellent results over the long-term: iShares S&P 500 ETF (ASX: IVV), Vanguard MSCI Index International Shares ETF (ASX: VGS) and Vanguard US Total Market Shares Index ETF (ASX: VTS).
You could say that Vanguard FTSE Asia Ex Japan Shares Index ETF (ASX: VAE) also belongs in the above group.
The other group of ETFs that is worth considering in my opinion are ones that have around 50 to 100 holdings that offer a more concentrated exposure to an idea such as: BetaShares NASDAQ 100 ETF (ASX: NDQ), BetaShares Asia Technology Tigers ETF (ASX: ASIA) and UBS IQ MSCI Asia APEX 50 Ethical ETF (ASX: UBP).
If you regularly invest in ETFs over many years, ignoring any temporary market dips, it should result in your wealth being large enough to be able to retire early.
ETFs aren’t the only ASX shares that would allow you to retire early of course, there are quality ASX businesses that you could own for the long-term alongside your ETFs. Challenger Ltd (ASX: CGF) and CSL Limited (ASX: CSL) are two long-term growth examples.