Five ETF Picks For Your IRA

by on April 15, 2011 | Updated November 21, 2012

Saving for one’s retirement can certainly be a daunting task. After the crash of the markets in 2008, many everyday investors saw a large chunk of their retirement savings go down the drain in just a matter of months, leaving some in a deep hole. While those close to retirement have been hit but the recent crisis, things aren’t looking much better for the younger generation either.  Unfortunately for the majority of today’s population, anyone born after 1960, they must wait until age 67 to collect full retirement benefits, putting extra pressure on investors to supplement their retirement checks with extra income. With these key social security payments slowly slipping away, investors must now, more than ever, carefully plan for their later years [see also ETFs Set Sights on Retirement Plans].

Enter ETFs: low cost vehicles that offer diverse exposure through a single ticker. As ETFs have rapidly moved to displace expensive and illiquid mutual funds, with nearly 1,200 funds standing at over $1 trillion in assets, it is no surprise to see more investors gravitating towards exchange traded products for their IRAs. Many investors have grown tired of mutual fund managers who have been proven to fall short of their respective indexes 80% of the time, showing that passive indexing can be a safer strategy for solid returns. ETFs also offer other advantages, such as tax efficiencies, transparency, and rebalancing to make sure a fund’s assets stay in the desired proportions.

Of course, as with any investment, ETFs do have their downsides. Many funds have come under fire for tracking error, which can lead to a fund’s return straying from that of the index it claims to track. This can occur for several reasons: ETFs cannot always hold all of the components of an index, leading to a different return from the underlying benchmark [see also Why ETF Tracking Error Occurs (And How To Avoid It)]. Some have also blamed the products for being prone to flash crash type situations while others say that ETFs are partially responsible for the rise in commodity prices since now more investors than ever can participate in this once cloistered market.

Despite their downsides, ETFs present themselves as the best option for investors looking to contribute to a hands-off IRA. Their diversification helps to smooth out some volatility and their low cost allows investors to keep the majority of their gains. Below, we outline five strong exchange-traded picks for your retirement account that could make for interesting long-term additions to any portfolio [see Free Report: How To Pick The Right ETF Every Time]:

BICK Index Fund (BICK)

This ETF from First Trust, is a play on the popular ‘BRIC’ nations, but instead of including Russian exposure, BICK replaces it with South Korea. The fund measures an index which is designed to track the largest and most liquid public companies that are domiciled in Brazil, India, Mainland China and South Korea. This product invests the majority of its assets in giant and large cap firms, giving the fund a nice mix of stability and growth for investors using a long term buy-and-hold approach. From a country perspective, the fund splits its assets by putting approximately 25% to each of the four component countries, adding a strong emerging markets presence to a portfolio [see also Does South Korea Belong In Your Emerging Markets ETF?].

Emerging markets used to be a far-fetched concept, but now that ETFs have opened up the world of these fast growing economies, many consider an investment in these bustling nations a must for any properly diversified IRA. Now that the U.S. has exited its rapid growth stage, emerging markets are the up-and-coming countries that may offer the high growth that a retirement portfolio needs, especially for those that are decades away from retirement [see 50+ All-ETF Model Portfolios].

PowerShares DB Commodity Index Tracking Fund (DBC)

DBC seeks to replicate an index which is a rules-based index composed of futures contracts on 14 of the most heavily-traded and important physical commodities in the world. These contracts include exposure to futures of heating oil, natural gas, crude oil, sugar, and others. DBC is also careful to spread its contracts out over various months, providing a safety net in case any particular month is bad for commodities while also helping to limit the effects of contango as well. In 2010 alone, this fund gained a healthy 11.85% for its investors [see also Ten New Years’ Resolutions For ETF Investors].

For the time being, commodity exposure is not a popular option for a retirement account, but as these economic staples continue to surge in both popularity and price, their additional to a long-term portfolio could be very beneficial to some investors. With the world’s population rapidly expanding, we will consume more of these every day commodities in record amounts, possibly pushing up prices and making an investment in commodities an intriguing pick for long-term focused investors.

Peritus High Yield ETF (HYLD)

HYLD is a unique ETF, in that it is one of the only actively managed high yield bond funds. While active management typically doesn’t add value, this product offers an interesting spin on the market that many investors may find attractive. HYLD’s objective is to select debt securities that, via their coupons, generate a high income stream. Furthermore, the fund seeks to avoid companies that issued debt in the period right before the bubble burst and the manager will not buy fresh issues of debt instead waiting to see how it trades on the open market first.

Fixed income is a vital part of a retirement account, and this fund offers a unique strategy that may be optimal for today’s market conditions. With interest rates at an all time low, and likely to rise sometime in the near future, an active debt fund could be better positioned to adjust accordingly, whereas a passively indexed bond fund could be more adversely impacted by rising rates. This may be a strong addition for those who buy into active management in the ETF world [see also Active ETF Option For Junk Bond Exposure (HYLD)].

KBW High Dividend Yield Financial Portfolio (KBWD)

KBWD is a relatively new fund, which tracks a dividend weighted index that seeks to reflect the performances of approximately 24 to 40 financial companies in the US. The ETF allocates the majority of its assets to small cap companies, like Annaly Capital Management, and American Capital Agency, which give it added risk, but for investors who are willing to put up with added volatility, they are handsomely rewarded. KBWD’s current 30-day SEC yield is 9.56%, a robust dividend that will help boost an IRA looking for steady income or for those with a dividend reinvestment program.

The importance of a dividend in a portfolio can be lost on some investors, but these steady income securities can make all the difference as the years go on [see more at ETF Dividend Ideas For 2011]. KBWD may be a good option for investors willing to put up with the risk of small cap companies, in order to obtain a juicy yield to boost their IRA’s gains.

Guggenheim Solar ETF (TAN)

TAN represents a play on alternative energy, as this ETF tracks the MAC Global Solar Energy Index, which generates returns based on companies operating in various sectors of the solar energy industry. Top holdings of this fund include major solar players First Solar (15.7%), and Trina Solar (5.8%), as well as several other big names in the sector. The majority of TAN’s assets lie between small and large cap firms, with a bias toward medium cap companies. It should be noted that this ETF also contains significant international exposure, as solar power is presently more popular overseas. So far in 2011, TAN has returned an impressive 14.5% [see also Solar Energy ETFs Shining Bright In 2011].

An investment in alternative energy is a play on our attempt to break the global fossil fuel addiction. Many believe that oil supplies will run low in the coming years, forcing the world to turn to alternative sources for energy needs, which is where an investment in solar energy comes into play. This fund could be a good addition to those who believe that alternative energies will grow in prominence over the coming years and decades ahead.

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Disclosure: No positions at time of writing.