With tax day here, many investors are likely scrambling to make one final contribution to their retirement accounts for the 2013 tax year. But with high momentum stocks plunging and worries building over a continuation of the rally, some might be wondering where exactly to put their cash.
Fortunately for these investors, the ETF world is rife with choices that both segment the market, and allow for lower risk due to the large basket of securities that each fund holds. That is why making an ETF selection for an Individual Retirement Account could be an excellent idea.
In particular, we are going to focus in on Roth IRA investors for this article. The important item to remember about a Roth IRA account—as opposed to a traditional IRA—is that capital that goes in is already taxed.
This means that money invested in a Roth IRA is allowed to grow tax free and that you do not have to pay any taxes once you pull your money out (assuming you have waited until your eligibility date has passed). A Roth is the type of account I personally use, as I prefer the tax-free growth features of this account for my needs, and I think that many other investors can reap the benefits of this approach as well.
Some ways that investors can make this tax-free growth work for them are by focusing on either ETFs that could see solid long-term growth-- and thus build up big tax-free capital gains-- or those that have decent growth prospects and great dividends, which can allow those that utilize dividend reinvesting to build up a huge position over the years. Below, we highlight 5 ETFs that fit in nicely with one of these themes, thus making them great picks for investors unsure of how to play this volatile market:
Renaissance IPO ETF (IPO)
For investors seeking new companies that have just had their IPO, this fund from Renaissance Capital represents a very interesting choice. This fund follows a list of about 60 new stocks, adding some as quickly as five days after their debut, and holding them for up to two years after their initial offering, giving a heavy focus on growth companies.
The current portfolio is skewed towards technology firms, as these account for roughly 27% of assets, though energy, health care, consumer discretionary and real estate all make up at least 10% as well. The fund also has a mid cap growth focus, so stocks in this portfolio should have plenty of runway before they become value securities (read Profit from the Booming IPO Market with These ETFs).
Investors should note that this product does charge 60 basis points a year in fees, so it isn’t quite as cheap as some of the others on the list. Additionally, there is a close competitor, the First Trust IPOX 100 ETF (FPX) which could offer a less volatile way to play the IPO market that also includes some spin-off securities, if investors are looking for a safer way to play this corner of the market over the long term.
WisdomTree Emerging Markets Equity Income ETF (DEM)
Emerging markets are poised to grow quickly over the next couple of decades as these surging markets take up more of the total world economic pie. And while growth potential here is enormous, a dividend play could be the best of both worlds with a fund like DEM.
DEM follows the WisdomTree Emerging Markets Equity Income Index, a benchmark of about 370 securities from emerging markets around the globe. BRIC countries—along with Taiwan and South Africa—dominate the list of top markets, while financials, energy, and materials, are the big sectors from an industry look (see all the Broad Emerging Market ETFs here).
The real focus of this product though is the yield, as the fund sports a 4.1% SEC 30-day yield. This, coupled with the immense growth potential of emerging markets, could make this product a long term winner for investors who can tolerate developing country stock volatility.
Vanguard Small Cap Growth ETF (VBK)
Yes, small caps have been getting hit hard in this recent slump, but there is still tremendous long term potential for the small cap growth category. This is especially true for U.S. stocks, as the American market is primed for more growth in the years ahead, particularly when compared to other developed markets such as Europe or Japan, suggesting a U.S. small cap tilt is a good approach.
However, given the risks, an ETF approach could be a far safer way to play the space, as VBK holds over 650 stocks in its basket, giving no more than 0.75% to any single security. The ETF is pretty spread out too, as technology (22%), consumer cyclical (17%), and health care (15%) take the top three spots, though they do not dominate the basket.
Investors should also note that although the annual dividend yield here is quite small, the fund does represent a tremendous value from a cost perspective. The ETF charges just 10 basis points a year in fees, ensuring that long term investors don’t see their returns eroded by management fees (also read WisdomTree Launches Small Cap Dividend Growth ETF).
Guggenheim S&P Global Dividend Opportunities ETF (LVL)
If you are looking for dividends but seek more of a global focus, LVL could be the ticket for you. This product holds a wide range of securities from a number of developed and emerging nations, acting as a broad dividend stock barometer for securities outside of the U.S.
The product looks to be a bit safer than many of the others on this list too, as telecoms, financials, and utilities take the top three spots from a sector perspective. Plus, the ETF has close to 40% of its assets in large caps, and just about 20% in the small cap segment.
Investors here have to really enjoy the yield aspect of this product though, as the 30-Day SEC yield comes in at an impressive 5.4%. This huge yield, protected by the tax-free growth nature of a Roth IRA, could be a great pick for investors seeking to build up their portfolio over time with an international focus.
Robo-Stox Global Robotics and Automation Index ETF (ROBO)
For investors focused on growth, a look to a sector that is poised to rise in prominence over the next several decades could be an interesting play. One segment that stands out in this regard is robotics and automation, as this industry has seen strong growth and looks to permeate more corners of the industrial and consumer worlds as time goes on (see Invest in Robotics with This ETF).
Investors can target this market with the relatively niche ROBO ETF. This ETF launched in October of 2013 but has already obtained more than $100 million in assets under management. The fund has a pretty diversified portfolio too, as it holds more than 80 stocks including a 25% allocation to the U.S., 25% to Japan, and an eight percent holding in German stocks.
The fund has a nice mix across cap levels—no segment makes up more than 40% of the total—while technology and industry via for the top two industry spots at 33% and 49%, respectively. Investors should note that the ETF is a bit pricey at 95 basis points a year, but the price appreciation from the sector, coupled with the societal push towards the technologies here, should more than make up for the cost.
Markets have been extremely choppy as of late, and concerns are definitely building over a continuation in the equity rally. High flying momentum stocks have been leading the market lower, and many are likely wondering how best to invest in this type of environment (also read 3 High Yield ETFs for Your IRA).
But if you are using a Roth IRA, a long term focus is likely the best course of action, suggesting that these recent market issues shouldn’t be too much of a concern to your portfolio. So consider buying any of the aforementioned ETFs, as all of these look likely to be strong long term winners for investors willing to push through the current round of market volatility.
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Read the analyst report on IPO
Read the analyst report on FPX
Read the analyst report on DEM
Read the analyst report on ROBO
Read the analyst report on VBK
Read the analyst report on LVL
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- Roth IRA
- Emerging markets