Are you interested in growing your IRA's total balance, but disinterested in picking individual stocks to do so? That's OK. You're not alone, and you're not out of luck.
There are plenty of exchange-traded fund (ETF) options for investors looking to passively build a retirement nest egg that doesn't leave the investor feeling like he or she could be -- and should be -- doing more.
Here's a closer look at three top ETF prospects that would be at home in most individual retirement accounts (IRAs).
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1. iShares Edge MSCI Minimum Volatility Fund
Have you ever heard the premise that greater growth will be paired with greater volatility from stocks since those stocks are riskier holdings that traders don't always know how to price? If you've been in this investing game for any length of time at all you probably have, and for the most part, the idea is true; big gains require tolerance of occasional big-time price swings in both directions.
A careful look at the stock market's philosophical landscape of late, however, reveals something curious. We've actually tiptoed into an environment where handling volatility is worn like a badge of honor, and where risks are taken just for the sake of taking a risk. Potential rewards and the actual odds of success aren't always key considerations anymore.
You don't have to make a point of seeking out risks and digesting volatility to do well in the market, however. In fact, given the likelihood that extreme risk-taking and volatility can wipe you out altogether (emotionally as well as financially), you should make a point of avoiding both.
Enter the iShares Edge MSCI Minimum Volatility Fund (USMV 0.24%).
Just as the name suggests, the iShares ETF aims to hold stocks with less volatility than the overall market dishes out. This ETF's beta score is 0.76 versus the S&P 500's beta of 1.0, meaning on any given day its holdings as a group only move about three-fourths as far as the benchmark index does. This includes moves both up and down, on average.
There's a curious nuance with this fund's holdings, though. That is, while the iShares Edge MSCI Minimum Volatility Fund only captures about 77% of the overall market's gains, it only suffers 62% of the market's pullbacks. It may never outperform the market, but it's the sort of holding you feel more comfortable holding onto when things get rocky. That's a huge deal, as too many investors tend to bail out of volatile stocks at the worst possible time.
2. Invesco QQQ ETF
Talk about moving from one extreme to the other! Whereas the iShares Edge MSCI Minimum Volatility Fund is designed to steer clear of the broad market's wild swings, the Invesco QQQ ETF (QQQ +1.91%) arguably leads on volatility.
The Invesco QQQ ETF is of course based on the Nasdaq 100 index, or what are typically the 100 biggest non-financial Nasdaq-listed names. It's wildly top-heavy, however, with Apple, Microsoft, Amazon, Alphabet, and Facebook accounting for more than a fourth of the fund's total market capitalization. Tesla and Nvidia come in as the fund's sixth- and seventh-biggest holdings.
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The challenge to prospective investors is obvious. These names are not only among the market's biggest, but also the market's most-watched and most-traded tickers. As such, they also invite a great deal of speculation that leads to the same extreme volatility that the iShares Edge MSCI Minimum Volatility ETF is built to avoid.
There's a strong bullish argument to be made for the Invesco QQQ ETF despite its inherent volatility, however. That is, it's a great way to plug into the technology sector that's been the best performer for years now as well as the tech companies that are clearly going to shape the world's future. Nearly half of this portfolio is technology stocks! The other sectors represented in QQQ smooth out some of the rough edges caused by the tech sector's typical volatility.
3. WisdomTree U.S. Quality Dividend Growth ETF
Finally, add the WisdomTree U.S. Quality Dividend Growth Fund (DGRW +0.22%) to your list of ETFs suited to grow your IRA.
At first blush, it seems to compete with more marketable ETF concepts like the ProShares S&P 500 Dividend Aristocrats Fund (NOBL 0.81%), which of course consists of S&P 500 companies that have upped their annual dividend payouts every year for at least the past 25 years.
There's an often-overlooked reality about the Dividend Aristocrats, however, that most investors may want to acknowledge. That is, some of these companies are only making minimal, below-average improvements to their yearly payouts just to retain their Dividend Aristocrat status, and a few of them are actually earning less than they're dishing out in the form of dividends. Neither are recipes for serious, long-term investment success.
WisdomTree is taking a smarter stock-picking tack though, by focusing less on a company's dividend history and instead seeking out stocks of companies that are clearly capable of supporting future dividend growth. The WisdomTree U.S. Quality Dividend Growth Index used as the basis for this particular ETF considers long-term earnings growth expectations at the same time it scrutinizes an organization's historical return on equity and return on assets.
The approach has proven its merits. While the ProShares S&P 500 Dividend Aristocrats Fund's current dividend yield of 1.94% is better than WisdomTree U.S. Quality Dividend Growth ETF's yield of 1.78%, DGRW stock has outperformed NOBL to more than offset that dividend differential. The latter is only up a little less than 70% for the past five years, while the WisdomTree fund is up a little more than 90% for the same time frame.
