5 ETFs for Your 2015 IRA Contribution
It is that time of the year again as many scramble to finish up tax returns or at least get an extension. This is also a great time to look at personal finances in general, and in particular, IRA contributions.
Be it traditional IRAs where the contributions are tax deductible, or Roth IRAs where withdrawals are tax-free, these accounts offer up great ways for individuals to save for retirement in a tax-advantaged manner. And best of all, IRAs allow investors to buy individual stocks or ETFs, something that is usually absent from 401(k) plans across the country.
ETFs in particular can be great picks for retirement accounts because they often offer lower fees than mutual funds while still providing investors with great diversification benefits. But some might be confused as to which are the best selections in the ETF world for IRAs but we have distilled the list of more than 1,700 funds into five which are compelling choices for long term investors (also see 3 High Yield ETFs for Your IRA).
The list below offers up a nice mix between long term growth and value while we also took into account funds which pay out a decent level of income, as these can take advantage of an IRA’s tax-sheltered status. Either way, there should be something for every-type of IRA investor on the list below for those seeking some ideas for their IRA contribution this year:
Guggenheim S&P SmallCap 600 Pure Growth (RZG – ETF report)
Over a long time frame, small caps can outperform thanks to their impressive growth prospects. And if you are looking for only the stocks with the best growth characteristics, then RZG will be tough to beat.
Unlike many cap-focused ETFs, the ‘Pure’ series from Guggenheim offers no overlap between growth and value styles. That’s right, many growth and value ETFs actually share some of the same holdings, but not RZG and its brethren as they only focus on the stocks that either have the most impressive value or growth metrics.
Currently, financials take the top spot at about 21% of assets, followed closely by health care and consumer discretionary. Telecom, staples, and materials take the bottom three sectors, while we should also note that no single stock makes up more than 3% of the total (see 3 Best Performing Small Cap Sector ETFs of 2014)
This fund is bound to be volatile and risky, and especially over short time periods. However, over the long haul, small cap growth stocks can offer up solid performance and this fund in particular could make for a nice add in IRA portfolios.
WisdomTree Emerging Markets Dividend Growth ETF (DGRE – ETF report)
If you are in it for the long-haul then you probably want at least a little exposure to emerging markets. Yes, these countries have been volatile lately, but their long term potential is undeniable for investors. If you are looking to take less risk in the space though, an allocation to DGRE may be right up your alley.
DGRE only invests in emerging market stocks that not only pay dividends, but have been consistently growing as well. This means that the yield might not be huge, but you will get a list of reasonably stable companies which have shown an ability to grow year after year.
Currently, the portfolio is focused on sectors like consumer staples (18.3%), technology (17.55%), and telecoms (17.3%), leaving little for utilities, health care, and industrials. Meanwhile, for countries, South Africa, Taiwan and Brazil take the top spots, giving the fund an interesting mix as most emerging market ETFs are pretty Mainland China-centric (see all Emerging Market ETFs here).
While the yield here is just under 2%, it could be an interesting choice for those looking for a bit more stability in their emerging market allocation, while still allowing for growth. After all, the benchmark also takes into account long-term earnings growth expectations so this could be a nice mix for many investors seeking additional assets in emerging market nations for the long term.
First Trust ISE Cloud Computing ETF (SKYY – ETF report)
Any long term portfolio would be foolish to not include at least a little bit of exposure to a quickly growing technology industry. While there are numerous choices in this segment, a higher risk/higher potential segment is cloud computing. Arguably the best way to play the space is via an ETF as this will spread the risk around but keep investors from getting burned by one or two bad picks. Fortunately, we have that now with SKYY.
SKYY tracks the First Trust ISE Cloud Computing Index which focuses on companies that either support or utilize cloud computing for their business. Tech conglomerates are limited to about 10% of the portfolio, while there is a focus on ‘pure play’ companies which deliver goods and services on the cloud, or those that are direct service providers for the cloud (also read iShares Plans an Exponential Technology ETF).
Currently, the fund holds about 40 stocks in its basket, while no single company makes up more than 5% of the total. Some of the top holdings in the ETF include Netflix, Red Hat, and Informaticia, while software (38.4%), internet services (21.5%), and communications equipment (15.1%) take the top three spots from an industry look.
Cloud computing has already taken over many industries and its importance to a variety of businesses can’t be overstated. So, if you have a long time horizon this may be an excellent segment to take a sector bet on if you are looking to increase your technology exposure.
SPDR DoubleLine Total Return Tactical ETF (TOTL – ETF report)
Few investors are more respected in the bond world than Jeff Gundlach. He finished in the top 2% of all funds when at TCW Capital, and he has remained a force in the fixed income world with the founding of DoubleLine Capital.
While DoubleLine is best known for its mutual funds, the company recently launched an ETF as well. Their fund, TOTL, looks to maximize total return for investors and is run by Gundlach and a few other members of his team for just 55 basis points a year in fees (read Active Bond ETFs Head to Head: BOND vs. TOTL).
Right now the fund is heavily focused on mortgage-backed securities as these account for roughly half the portfolio. Emerging markets account for another 9.4%, while Treasury bonds take up just 4.5%, a huge contrast when compared to the Barclays U.S. Aggregate Bond Index which has over 35% of its benchmark in Treasury securities.
While the 30-Day SEC yield isn’t yet available, the average coupon for the fund is 4.36%. So the fund could be a decent income choice and a core long-term bond holding that is backed by one of the most respected bond managers in the world right now. Obviously, this makes TOTL a compelling choice for those seeking active management in the fixed income portion of their long-term portfolios.
Guggenheim Spin-Off ETF (CSD – ETF report)
While many investors overlook spin-offs, these can actually be among the best performing stocks in the market. After all, when companies are trading as separate entities, they can do as they please and trade independently of their former parents which can allow for better management and greater flexibility.
Fortunately, ETF investors have an easy way to target these types of companies with the Guggenheim Spin-Off ETF (CSD – ETF report). This fund tracks the Beacon Spin-off index which looks to focus on about 40 companies that have been spun-off within the past 30 months, but not more recently than six months prior to the applicable rebalancing date.
Current top holdings focus in on the consumer discretionary sector (22%), financials (20%), and industrials (16.2%). Meanwhile, the ETF lags a bit in terms of assets to telecoms, energy, and materials, three segments which are generally very capital intensive and tend to do better the larger they are (see all the Total Market ETFs here).
I like this ETF for those with a long time horizon (note that I own shares of CSD for my personal long-term account), but it probably doesn’t make much sense as a quick trade. After all, over the past five years, CSD has done an excellent job including an 128% gain in the time period, thoroughly crushing the S&P 500’s 74.6% return in the same time period.