Stocks are certainly more interesting to own than exchange-traded (ETFs) funds. They offer investors a chance to outpace the market and also provide for more active participation in the direction of a company via shareholder votes held at annual meetings.
But ETFs are an ideal option for most portfolios. Like mutual funds, these baskets of stocks offer built-in diversity that curbs the typical volatility of individual equities. Yet unlike mutual funds, ETFs can be bought and sold during a trading day like a stock. Best of all, exchange-traded funds come in a wide range of sector, style, geographical, and market cap categories, and are regularly rebalanced by their issuers. All you have to do is develop an allocation strategy, pick ETFs to fill those slots, and let time do the work for you.
That's what makes ETFs ideal for individual retirement accounts (IRAs), which tend to be the parking place for money meant to become a nest egg for later. It can be easy to squander a portfolio of stocks just because it's tempting to buy and sell them too often. ETFs lend themselves to a buy-and-hold strategy.
To that end, the iShares Core Dividend Growth ETF (NYSEMKT:DGRO), the SPDR Portfolio TIPS ETF (NYSEMKT:SPIP), and the SPDR Wells Fargo Preferred Stock ETF (NYSEMKT:PSK), and the Invesco Water Resources ETF (NASDAQ:PHO) make up a quartet of exchange-traded funds particularly well-suited for IRAs.
1. iShares Core Dividend Growth ETF: A reliable raise
Even before an investor retires (and certainly after), dividends are often a core component of a portfolio. They can be used to supply cash to make new investments during growth years, but when it comes time to slow down, retirees require income to live on. The challenge is to find dividend income that at least keeps up with inflation.
The iShares Core Dividend Growth ETF is up for the challenge. This exchange-traded fund is specifically built not just to hold healthy dividend payers, but to hold dividend-paying companies with an established track record of dividend growth. Some of its biggest holdings are Verizon, Johnson & Johnson, and Procter & Gamble, which have improved their dividend payouts for 13, 58, and 64 consecutive years, respectively.
Perhaps even more compelling is the fact that the bulk of the fund's blue-chip holdings are usually in a good-enough position to easily increase their payouts.
2. SPDR Portfolio TIPS ETF: Is inflation your only concern?
Speaking of inflation, the SPDR Portfolio TIPS ETF is another smart way to make sure price increases don't exceed your gains. It's an exchange-traded fund that would be part of the bonds or fixed-income portion of a portfolio, as it's made up of TIPS, or Treasury Inflation-Protected Securities.
TIPS is a special type of bond, issued by the U.S. Treasury, that dishes out interest payments twice a year like many other government-issued securities. But the principal value, as well as the interest payment, is regularly adjusted to increase in value relative to the nation's prevailing inflation rate.
This option might be best used in moderation, though, to meet a particular inflation-minded need. TIPS payments also shrink when the United States is in a deflationary environment.
3. SPDR Wells Fargo Preferred Stock ETF: Preferred stocks are a perfect hybrid
IRA owners shouldn't forget about preferred stocks and their corresponding funds like the SPDR Wells Fargo Preferred Stock ETF. As the name implies, this ETF is a basket of preferred dividend stocks. Among its top holdings are preferred securities from established names like Citigroup and AT&T.
Preferred stocks are something of a hybrid between bonds and the common stocks typically sought by investors. The dividend payments issued in relation to them are the focus of these types of stocks (as opposed to stock price growth) and, while they aren't technically a legal loan obligation in the same sense that interest payments on bonds are, preferred stockholders' dividends are generally prioritized over any dividends that common stockholders might expect to receive. If a company is forced for some reason to suspend dividend payments to investors (including preferred shareholders), that company generally tries to eventually make up for preferred stockholders' missed payments (which it wouldn't do for common stock owners). This makes the dividend payment somewhat more secure for preferred shareholders.
The downside? Preferred shareholders don't get to participate in stock price appreciation the same way a common shareholder would as the price doesn't fluctuate as much. It might be worth it, though, given their superior payouts. The AT&T preferred stock held in the SPDR Wells Fargo Preferred Stock ETF was issued with a then-healthy dividend yield of 5.35%. Newcomers will enjoy a still-healthy yield of more than 5%. Citigroup's yield on the preferred shares held in the fund is a floating rate but currently yield somewhere around 7%.
4, Invesco Water Resources ETF: A business with no expiration date
Finally, because many investment sectors and industries tend to be cyclical, ETFs that are focused on one of these narrow slivers of the market can be risky if owned at the wrong time. Companies operating in the water industry are mostly immune from cyclical ebbs and flows (no pun intended). This makes the Invesco Water Resources ETF a steady, perpetual powerhouse for retirement accounts.
About one-quarter of the fund consists of water utility names like American Water Works and Essential Utilities. At the very least, these companies provide reliable dividend income and stability, as these stocks' performance ultimately reflects how water utility customers pay their monthly bills. Water is one thing people just can't go without.
Around half of the Invesco Water Resources ETF is made up of industrial companies such as Danaher and Tetra Tech. These names are seemingly subject to economic swings. But these industrial holdings are highly focused on water purification and conservation. Considering the water scarcity challenges the world -- including the United States -- is increasingly facing, these companies should always be able to find growth opportunities.
We can't simply make more water and have no choice but to better manage what we have. These names help make it happen.