Three Great ETFs For Your IRA


Thanks to a holiday in Washington D.C., U.S. residents had a brief extension over the traditional April 15th deadline in order to get income tax returns in on time. With many (including yours truly) waiting until this past weekend to get their returns in, this extra two day time frame was welcomed news to say the least.

The extra time has also allowed some investors to make one last contribution to their IRAs, just squeezing by the deadline for the 2011 tax year, or at the very least getting a head start on 2012 deposits. Yet with markets slumping as of late—but still near 52 week highs—some might be wondering what is the best place to put their new cash (see more in the Zacks ETF Center).

In light of this trend, it is important to remember that IRA investing should be focused on the long-term. After all, besides a few exceptions, investors must wait until they are 59 and ½ before taking any distributions, lest they pay a penalty.  Thanks to this reality, investors should look beyond the present troubles in the market and consider what will be big or important years into the future.

While there are a number of great ETFs that can help investors accomplish this task, we have selected three equity ETFs below that could offer outsized opportunities for those willing to invest for the long term. These three products could be ideal for those with a decent risk tolerance and the ability to overlook short term fluctuations for long-term gains (read A Primer On ETF Investing).

Furthermore, investors should note that all three of these choices stay outside of the fixed income world. This approach looks to cut down on risks and promote growth as fixed income ETFs could be in for a rough patch at some point in the future should yields spike.

As a result, fixed income may not be the best idea—at least in large quantities—for an IRA investment, suggesting that investors should look to these three equity ETFs for their allocations instead:

Market Vectors Agribusiness ETF (MOO)

According to some estimates, the world population will reach nine billion by 2050, a nearly two billion increase from today. This means that the world population will grow by about a billion once every twenty years, a scenario that looks to put a huge strain on the carrying capacity of the globe (read Teucrium Launches New Basket Agriculture ETF).

One of the biggest beneficiaries of this trend looks to be the broad agribusiness industry as farmers scramble to produce more food for the world’s hungry population. Thanks to this, as well as the very likely possibility of higher food prices, farmers look to have a ton to spend on agricultural products ranging from machinery to fertilizer and everything in between.

In order to play this trend, investors should look no further than Market Vectors’ Agribusiness ETF (MOO). This ultra popular fund has assets under management over $5.5 billion and sees robust volume approaching 900,000 shares a day.

Nearly 40% of the portfolio goes to agricultural chemical firms, while farming and fishing account for another 30% of holdings. Packaged food products and industrial engineering also make up, respectively, 11% and 15% of the fund too.

Furthermore, investors should note that the product has a decent breakdown from a country perspective. North America accounts for half the holdings, but Asia Pacific firms (19%) and European assets also take up a decent chunk of assets as well.

While the yield—0.6%-- isn’t that great in this agribusiness ETF, the trends are certainly in the industry’s favor. Assuming that population growth continues to remain strong across the globe, MOO, or any number of the other agribusiness ETFs, look to make solid choices for the long term.

WisdomTree Emerging Markets SmallCap Dividend Fund (DGS)

While many developed markets continue to tread water, the emerging market growth story remains an unstoppable force in the global economy. In fact, some reports suggest that close to 70% of world growth will come from these markets over the next few years while by 2020, BRICs are expected to account for nearly 50% of all global GDP growth.

Still, many U.S. investors remain woefully underequipped to play this trend as most Americans are still heavily concentrated in domestic stocks. This could be to their determent, especially if positive emerging market trends hold and these nations continue to be the main source of global growth going forward (also read Small Cap Real Estate ETFs: Crushing The Competition).

One way to play this tactic, with an interesting blend of growth and value, is via a small cap dividend ETF from WisdomTree.  The ETF already has over a billion in AUM and sees average daily volumes of nearly 170,000 shares, suggesting tight bid ask spreads.

However, the product does have a heavy focus on mid cap and smaller securities, a trend which could increase overall volatility in the product. Fortunately, the underlying index only includes firms that are paying cash dividends, giving the ETF a value tilt and an impressive 3.5% annual dividend yield.

Investors should also note that the product is well diversified from a country perspective too; three nations take up at least 10% of assets while another four account for at least 5% of the fund each. Given this breakdown, as well as the individual security allocations—over 500 companies are in this dividend ETF— investors can rest assured that company specific risk will not be much of a problem.

So, for investors who are light on emerging markets but are willing to play the small cap space, DGS can be an interesting choice. The focus on dividends could help to reduce volatility overall and if one uses a DRIP strategy, the gains over a long time period, assuming continued emerging market growth, could be immense for patient investors.

iShares MSCI-Germany Index Fund (EWG)

The European debt situation continues to plague the markets, dragging down a number of countries in the troubled region. Yields continue to rise for important PIIGS members and no end appears to be in sight for the common currency.

However, 10 to 20 years from now, it seems highly unlikely that Europe will still be muddling through this malaise. That is why now could be the time to position portfolios to play strong European countries that look to prosper no matter what happens, like Germany (see German ETFs On The Rise).

Not only is Germany a major exporter with a favorable current account balance, but the nation also has a very good investment climate as well. In fact, according to a recent global competitiveness report, Germany is one of the seven most competitive markets on Earth and ranks extremely high for innovation, business sophistication, and infrastructure.

Thanks to these metrics, Germany looks to have a sustainable competitive advantage over a host of other markets in the region. Furthermore, due to its relatively small size, the country will have no problem continuing to export at a high rate to both fellow European countries, as well as booming emerging markets.

As a result, investors should overlook the short-term worries in the European market and buy the German ETF for their IRA. The product is extremely liquid and has nearly $2.8 billion in AUM, suggesting extremely tight bid ask spreads. Additionally, the 3.1% yield could act as a nice boost in the meantime, especially for investors who reinvest their dividends.

In terms of holdings, the German ETF is unique when compared to other country-specific funds. Cyclical consumer stocks take the top spot, followed by double digit weightings to financials, materials, industrials, and health care. The product is a little concentrated from an individual security perspective, however, the ETF still holds over 50 stocks in its basket overall.

While in the near term Germany may face some issues, and even a sharp downturn if the worst happens in Europe, the country looks to be well-positioned for the long term. The ‘German model’ looks to still be strong decades from now suggesting that for investors who have a long time horizon and a medium risk tolerance, it could be the time to take a closer look at this product for an IRA investment.

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Author is long EWG.  

Read the analyst report on EWG

Read the analyst report on DGS

Read the analyst report on MOO

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