Daily Gains Letter

Should Fundamental ETFs Hold a Top Spot in Your Retirement Portfolio?

By for Daily Gains Letter |

140313_DL_whitefootWhile the Dow Jones Industrial Average continues to climb into uncharted territory, there is a large number of investors on the sidelines, holding their retirement funds, doubtful that the good times can continue to roll. And who can blame them—it’s not as if the underlying economic indicators are backing up Wall Street’s euphoria.

Unemployment remains stubbornly high, investors have been experiencing weak returns on equities, housing prices are still depressed, and Americans are saddled with high debt levels, low wage growth, and the declining availability of company pensions. All of which are obstacles to a comfortable retirement.

It should come as no surprise to learn that the disconnect between the Dow Jones Industrial Average and the underlying economic indicators are spooking the average investor. As a result, a lot of Americans looking for places to park their retirement funds have, on some level, given up on the idea of finding individual stocks to invest in. This is not the best strategy for investors looking for income streams as they near their retirement.

Those who want to own a balanced allocation of asset classes while keeping costs down should consider exchange-traded funds (ETFs). An ETF, similar to a mutual fund, tracks an index, commodity, or basket of assets and trades on a stock exchange where individuals can buy or sell shares at their discretion.

On January 22, the investing community (quietly) celebrated the 20th anniversary of the first (and most popular) ETF in the U.S. Now the SPDR S&P 500 (NYSEArca/SPY), the fund corresponds to the price and yield performance of the S&P 500 index.

Since then, exchange-traded products (ETPs) have mushroomed, including 1,200 funds and related products worth $1.3 trillion in assets. With that much variety, it can be tough for investors to know where to begin. (Source: “Frequently Asked Questions About the U.S. ETF Market,” Investment Company Institute web site, last accessed March 13, 2013.)

When looking for an ETF, consider those that use fundamental factors to pick securities. Why? Because fundamental factors take a company’s financial statements into consideration; they are less susceptible to manipulation and rely on easily accessible data.

Fundamental indices tend to weigh their basket of securities based on sales, cash flow, dividends, and book value. They’re less concerned about the price of an equity and more focused on long-term potential growth.

The iShares US Fundamental C$Hdgd Comm (TSX/CLU) ETF replicates the MFC Global Infrastructure Index and comprises the top-1,000 largest U.S.-listed companies based on fundamental value.

As of January 30, 2013, the company has provided a one-year total return of 18.3%, a three-year return of 13.4%, and a year-to-date return of seven percent. (Source: Yahoo! Finance, last accessed March 13, 2013.)

Even though it’s listed on the Toronto Stock Exchange (TSX), U.S. investors are exposed to American securities hedged by the Canadian dollar. This mean s that if the U.S. dollar decreases in value relative to the Canadian dollar, U.S. investors still make money.

The Vanguard Financials ETF (NYSEArca/VFH) tracks the performance of a benchmark index that measures the investment return of stocks in the financials sector.

As of January 30, 2013, the company has provided a one-year total return of 21.0%, a three-year return of 9.2%, and a year-to-date return of 7.7%. (Source: Ibid.)

Adding fundamental ETFs to your retirement portfolio is a great way to increase your exposure to the markets, allowing you to manage risk and diversify your portfolio.

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