The ASX-listed exchange-traded fund (ETF) space is a smart place to look for retirement investing.
Some Australians may want to find funds that are weighted towards businesses with strong capital growth potential. Other investors may want to own investments that provide a pleasing level of passive income.
There are advantages (and disadvantages) to each type of ETF strategy, so I think it's wise to look at both ideas.
Image source: Getty Images
Capital growth
The power of compounding can help capital growth deliver very pleasing wealth-building over time.
Capital growth would suggest that the businesses involved are growing revenue/profit at a useful speed to help send the share price higher over time.
I don't think investors can go too far wrong with an international-focused ASX ETF that provides pleasing exposure to high-quality, growing businesses such as Vanguard MSCI Index International Shares ETF (ASX: VGS) and iShares S&P 500 ETF (ASX: IVV).
But, I'm a big believer in the idea that higher-quality businesses will outperform average businesses over the long-term, particularly when the market/economy goes through a rough patch.
I like the following international-focused ETFs because of how they build a portfolio based on quality attributes: Global X S&P World Ex Australia GARP ETF (ASX: GARP), VanEck MSCI International Quality ETF (ASX: QUAL), Betashares Global Quality Leaders ETF (ASX: QLTY) and VanEck Morningstar Wide Moat ETF (ASX: MOAT).
I believe the four options above are great to consider for building wealth and they can also be great options for Australians looking to invest in retirement.
For starters, a retiree may still have decades ahead that their portfolio needs to last, so capital growth is a useful feature.
Secondly, when in retirement, Australians can unlock income by selling a portion of their investment holding each year. For example, if they have $100,000 in an ASX ETF, they could sell $4,000 to unlock a 4% cash flow 'yield'. Its long-term capital growth may be strong enough for the portfolio/ETF value to outpace the sales.
For example, if a $100,000 investment grows in value by 10% over a year it becomes $110,000 and a sale of $4,000 would mean $106,000 remaining for the next year. That's a combination of capital growth of $4,000 of income to spend.
ASX ETFs that provide dividends
Some retirees may not want to sell anything. Instead, their preference may be just to hold an investment and receive passive income from it.
A lot of internationally-focused ASX ETFs don't have a large dividend yield because the underlying shares don't have a large yield either, meaning there's not much income for the ETF to pass on.
Some people may like the Vanguard Australian Shares High Yield ETF (ASX: VHY) because it invests in high-yielding ASX shares, enabling it to give investors a lot of passive income. However, the compound earnings growth of the businesses in this fund are typically low, so I'm not a huge fan.
That's why I like ASX ETFs that have a pleasing targeted distribution yield while still providing investors with a good dividend yield.
One of my favourite ideas in this space is WCM Quality Global Growth Fund (ASX: WCMQ), which targets a distribution yield of 5%. Growth of the fund's net asset value (NAV) can unlock distribution growth for investors.
