3 ETF Winners for Retirement

by Marc Bastow | April 3, 2013 1:00 pm

ETFpromo2[1]With the first-quarter’s raging bull in the books, it’s probably a good time to count up all of our winners and re-evaluate our holdings. Let’s face it: A lot of us out there are just a tad concerned — perhaps due to our time horizon — that this rally can’t last forever (none of them do), so we want to look for ways to mitigate some risk.

While I might not suggest a total cash-out on stocks that are staring at big gains, it might be prudent to take some profits out of the biggest lunkers, then redeploy that money into some exchange-traded funds where we can spread out that risk among a much larger basket of stocks.

I like these three ETFs of three somewhat varying flavors because they provide a combination of risk protection via diversification, as well as income:

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StateStreetSPDR185[3]YTD Performance: +10.5%
Yield: 2.03%
Expense Ratio: 0.09%

What better way to take single-stock risk off your plate without exiting the market than … well, buying the market? The SPDR S&P 500 ETF (NYSE:SPY[4]), which tracks all 500 of the index’s components, is highly diversified across all the major sectors, and boasts a crazy-low expense ratio of less than a tenth of a percent! So, you get access to a score of blue-chips like General Electric (NYSE:GE[5]) and Johnson & Johnson (NYSE:JNJ[6]) without having to worry about the fallout from a single stock hitting the skids.

Best of all, exposure to this broad-based index also means exposure to a number of dividend stocks, resulting in a yield of roughly 2% — nothing to scream about, but it’s better than the 10-year T-Note right now.

However, you should note that the fund is weighted by market cap, which means stocks like $400 billion Exxon Mobil (NYSE:XOM[7]) have more effect on the fund than, say, $2 billion First Solar (NASDAQ:FSLR[8]). But again, the weight is spread across 500 stocks, so even a huge dip in XOM wouldn’t shatter the SPY.

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Vanguard High Dividend Yield Index ETF

Vanguard mutual funds 401(k)[9]YTD Performance: +11.73%
Yield: 2.96%
Expense Ratio: 0.1%

Vanguard’s High Dividend Yield Index ETF (NYSE:VYM[10]) is similar to the SPDR S&P 500 ETF in that it bunches hundreds of blue-chip companies together, but its specific purpose is investing in companies with higher dividend yields — and as a result, you’re looking at nearly a full percentage point more in yield than the SPY. And its year-to-date performance helps to show that you’re not necessarily sacrificing capital gains for that extra income.

Top holdings are fairly similar to the SPDR S&P 500 ETF — you’ve got Exxon, as well as Chevron (NYSE:CVX[11]) and Microsoft (NASDAQ:MSFT[12]), among others — though some of those top holdings carry significantly more weight (and thus, the fund is more susceptible to moves in those stocks) than they do in the SPY.

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iShares S&P U.S. Preferred Stock Index Fund

iShares185[13]YTD Performance: +3.02%
Yield: 5.81%
Expense Ratio: 0.48%

The iShares S&P U.S. Preferred Stock Index Fund (NYSE:PFF[14]) is a wholly different way to diversify, as we’re actually talking a different asset class: preferred shares.

Preferred stock often is called a “hybrid security,” since it has elements of both common stock and bonds. Preferreds provide a steady stream of income just like stocks — and, in fact, their dividends usually are higher than common stocks, and must be paid out before common stocks, meaning that payout is safer. However, they’re also are a rated security just like bonds, and they generally don’t carry voting rights.

The PFF is the largest ETF of its kind, by both assets ($10.75 billion) and number of holdings (288). The majority of the fund’s preferred shares are from financial and bank stocks like Wells Fargo (NYSE:WFC[15]) and Bank of America (NYSE:BAC[16]), though it also holds the preferreds of other companies such as General Motors (NYSE:GM[17]).

Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he was long MSFT and XOM.

  1. [Image]: https://investorplace.com/wp-content/uploads/2012/08/ETFpromo2.jpg
  2. Compare Brokers: https://investorplace.com/options-trading/broker-center/
  3. [Image]: https://investorplace.com/wp-content/uploads/2012/08/StateStreetSPDR185.jpg
  4. SPY: http://studio-5.financialcontent.com/investplace/quote?Symbol=SPY
  5. GE: http://studio-5.financialcontent.com/investplace/quote?Symbol=GE
  6. JNJ: http://studio-5.financialcontent.com/investplace/quote?Symbol=JNJ
  7. XOM: http://studio-5.financialcontent.com/investplace/quote?Symbol=XOM
  8. FSLR: http://studio-5.financialcontent.com/investplace/quote?Symbol=FSLR
  9. [Image]: https://investorplace.com/wp-content/uploads/2011/12/Vanguard.jpg
  10. VYM: http://studio-5.financialcontent.com/investplace/quote?Symbol=VYM
  11. CVX: http://studio-5.financialcontent.com/investplace/quote?Symbol=CVX
  12. MSFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=MSFT
  13. [Image]: https://investorplace.com/wp-content/uploads/2012/10/iShares185.jpg
  14. PFF: http://studio-5.financialcontent.com/investplace/quote?Symbol=PFF
  15. WFC: http://studio-5.financialcontent.com/investplace/quote?Symbol=WFC
  16. BAC: http://studio-5.financialcontent.com/investplace/quote?Symbol=BAC
  17. GM: http://studio-5.financialcontent.com/investplace/quote?Symbol=GM

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