The largest ETF provider in the country — iShares, which is owned by BlackRock Inc. (NYSE:BLK) — is releasing four new ETFs on Thursday. These funds will enable investors to get low-cost exposure to broad indexes in both the equity and fixed income spaces. The funds include the iShares Core Dividend Growth ETF (DGRO), the iShares Core MSCI Europe ETF (IEUR), the iShares Core MSCI Pacific ETF (IPAC), and the iShares Core GNMA Bond ETF (IUSB).
In what follows I will give an overview of each fund so that you can decide whether any of them would fit well with your portfolio strategy. Keep in mind that while there is no substitute for stock-picking, there are many instances when the best strategy and the best use of your time is to come up with an overall view of the macroeconomic environment and make investment decisions accordingly through index funds that own stocks in different regions or sectors in the economy.
1. The iShares Core Dividend Growth ETF
This fund is designed to replicate the performance of the Morningstar U.S. Dividend Growth Index, which you can read about in greater detail here. The basic idea of the index is to record the performance of stocks that have a long-standing history of raising their dividends. This strategy would appeal to more conservative investors and retirees who are looking for an income stream. These stocks are not going to skyrocket in value in a few weeks or months, but they will make you money in the long run. The fund will include several familiar holdings including Exxon Mobil (NYSE:XOM), Caterpillar (NYSE:CAT), Wal-Mart (NYSE:WMT), Oracle (NYSE:ORCL), and Union Pacific (NYSE:UNP).
2. The iShares Core MSCI Europe ETF
The iShares Core MSCI Europe ETF is designed to replicate the performance of the MSCI Europe Investable Market Index. It will be a good way for investors to get broad exposure to developed Europe. While the economies of individual European countries are very different European stocks tend to trade together. So a fundamental macro-investor might not be interested in this fund, but a trader could use it as a proxy for betting on or against European equities. This might also be a good fund for investors who want to invest in developed economies, but who want to avoid American and Japanese companies. The fund will consist of large-cap equities from fifteen developed European Union countries including Germany, France, the U. K., Switzerland, and Norway.
3. The iShares Core MSCI Pacific ETF
The iShares Core MSCI Pacific ETF is designed to replicate the performance of the MSCI Pacific Investable Market Index. Specifically this includes large cap stocks from the following five countries: Australia, Hong Kong, Singapore, New Zealand, and Japan. This fund will be useful to those investors who want a proxy bet on China, but who are concerned that Chinese equities are too risky. These countries are Chinese trading partners. Australia and New Zealand supply China with commodities that the Chinese use either for their own consumption or for producing products that they will then export. Singapore and Hong Kong are financial hubs where a lot of Chinese businesses operate. Japan is a manufacturer and supplier of value-added products to the world, and China in particular. One more thing to note is that this fund is going to be heavily weighted towards financials.
4. The iShares Core GNMA Bond ETF
This fund is designed to replicate the performance of the Barclays U.S. Universal Index, which is a global bond index of bonds denominated in U.S. Dollars. It holds Treasury Bonds, foreign government bonds that are denominated in U.S. Dollars, corporate bonds, and mortgage backed securities. So long as interest rates continue to decline this should be a good fund to own. And if you want so simply make a directional bet on global interest rates without exposing yourself to any one particular debt instrument this is a good way to do so.
However, the duration of many of these bonds is going to be short term, and as a result the net income that this fund will generate will be minimal—somewhere around 3 percent before taxes. Also keep in mind that bonds coupons are taxed as ordinary income unlike capital gains, with the exception of municipal bond coupons which are exempt from federal taxes and which are exempt from state taxes if you live in the state that issued the bond.
Disclosure: Ben Kramer-Miller is long Exxon Mobil.