Besides mutual funds, low-cost ETF’s also make a good investment for an IRA. Many of these exchange-traded funds have small management fees, making them cheaper to own than traditional mutual funds. The following five ETF’s can be expected to perform well in the future and could be bought at any discount brokerage firm.
Dow Jones Industrial Average (DIA)
The Dow Jones Industrial Average has outperformed many other investments over the long term with below average risk. The thirty stocks that make up the index are blue chip mega cap companies that have a history of above average performance. S&P Global offers the SPDR® Dow Jones Industrial Average ETF, which tracks the index with passive management. This structure produces an expense ratio of just 0.15%.
Unlike most funds that pay dividends quarterly, DIA makes distributions monthly. This payment schedule would be ideal for retirement savers who rely on a security’s income stream to meet monthly living expenses. DIA’s current dividend yield is almost 2.09%.
Morningstar has ranked the ETF four stars out of five for 3-year performance and five stars out of five over a 10-year period. The analyst also considers the fund to have high return potential with only average risk.
Fidelity’s Core Dividend (FDVV)
While DIA has the safety of mega cap companies, Fidelity’s Core Dividend ETF invests in smaller companies and therefore has higher return potential. The market cap of the average stock in FDVV is $36 billion, more than $40 billion lower than its category average. The portfolio invests in equities that have a history of paying dividends and are expected to increase cash payments in the future. The ETF has an overweight in utilities and an underweight in financials. More than 90% of the fund’s investments are in U.S. stocks. Approximately 6% of the portfolio’s assets are in foreign equities.
The fund’s expense ratio is a low 0.29%. Because FDVV was launched last year, there isn’t much return history at this point. But with Fidelity backing it up, investors can be sure that the fund will be managed well.
Vanguard’s FTSE Developed Markets (VEA)
While foreign stocks do have a tendency to be more volatile than U.S. equities, they also have a higher return potential and provide some portfolio diversification. Vanguard’s FTSE Developed Markets ETF would make a good addition to a retirement portfolio that can handle the increased risk. VEA invests in non-U.S. equities that are issued in non-emerging markets. These countries include Japan, the UK, the Eurozone, and Canada. The portfolio has an overweight in industrials and an underweight in technology. Some of the companies the fund owns include Toyota, Nestle, and HSBC.
VEA’s expense ratio is just 7 basis points, making it one of the cheapest developed markets funds available. It pays dividends quarterly and is currently yielding nearly 3%. The fund has outperformed its category over 3-year and 5-year periods. Morningstar has graded VEA four stars over the same time intervals. The analyst views the portfolio as having above average return with only average risk.
Core US Aggregate Bond Fund (AGG)
Investors who are nearing retirement might want to shift from stocks to bonds due to the greater price stability of debt instruments. The Core US Aggregate Bond Fund from iShares tracks the Barclays U.S. Aggregate Bond Index, which follows the overall U.S. investment-grade bond world. At least 90% of AGG’s holdings are in debt securities found in the index or assets that are essentially the same.
AGG has over $40 billion in portfolio holdings. Over 70% of its assets are AAA bonds, the highest ranked debt securities. Many of AGG’s holdings are U.S. Treasuries. Approximately 23% of the fund’s holdings are corporate bonds. Most of the coupon rates are between 0 and 4%, although a few are as high as 8%. The fund’s worst year was in 2013 with a -2% return, while its best year was in the tumultuous 2008, going up 7.9%. Over 3 and 5-year periods, AGG has outperformed its benchmark.
iShares’s US Real Estate Fund (IYR)
Despite the problems the U.S. housing market experienced in 2008, real estate as an asset class has performed well over the long term. This makes REIT’s an excellent choice for retirement savers who want to diversify a stock portfolio. iShares’s US Real Estate Fund has a current dividend yield between 3-4%. The average daily volume of IYR is over 8 million shares, making it one of the more popular ETF’s on the U.S. exchange. Such a high volume produces a bid-ask spread of just one penny, which makes IYR even cheaper to trade.
The market cap of the average REIT in the portfolio is under $13 billion, which is slightly less than the category average. The fund has outperformed the index it tracks over YTD, 1, 3, 5, 10, and 15-year periods.
Best IRA ETFs Final Thoughts
There are now many ETF’s available in the United States, some of which should be avoided. Doing just a minimal amount of research will help to separate the winners from the inevitable losers.
