Which ETFs Are Best For a Roth IRA?
Roth IRAs provide tax-free growth. ETFs offer an easy, cost-effective method of investing that may help you meet your investment goals.
When selecting an ETF for your IRA, three categories should be kept in mind when choosing an ETF: broad market index ETFs, bond ETFs, and international equity ETFs. Let’s take a look at each of them individually.
1. Vanguard Total Stock Market ETF (NYSEARCA:VTI)
Vanguard Total Stock Market ETF (NYSEARCA:VTI) is one of the world’s most widely held investments and an ideal Roth IRA investment option. This diversified fund gives you exposure to all sectors in the stock market while helping avoid overinvesting too heavily in any particular area.
Bogle popularized passive indexing and it has proven itself instrumental to Vanguard’s tremendous success. Both VTI and its mutual-fund counterpart, the VTSAX, track the CRSP US Total Market Index which offers an almost exact representation of all stock markets worldwide.
VTI and VTSAX both boast low fees. This is key since having lower expenses means your long-term returns will be even stronger; for instance, investing $10,000 with VTI would cost approximately $4 per year in management fees and administrative costs, much lower than most competing funds.
2. Vanguard Total Bond Market ETF (NYSEARCA:BND)
Vanguard Total Bond Market ETF (NYSEARCA:BND) is the best ETF to select for a Roth IRA because it provides an economic buffer during times of volatility while also producing consistent streams of income over time.
The BND ETF follows the Bloomberg Barclays U.S. Aggregate Float Adjusted Index, which comprises intermediate-term investment-grade bonds in the US with various maturities including Treasury bills and corporate bonds.
BND ETF features a low tracking error, meaning it closely tracks returns of its benchmark index. Furthermore, its trading volume is high: hundreds of millions change hands daily and its costs are comparable with that of the iShares Core U.S. Aggregate Bond ETF (NYSEARCA:AGG), although BlackRock offers more brand recognition and has been around longer. Vanguard offers lower expense ratio than BlackRock; thus making them more appealing choices for investors seeking to minimize fees in their portfolios and purchase fractional shares than ETFs such as SCHD which does not permit such capabilities.
3. iShares Core S&P 500 ETF (NYSEARCA:IVV)
The iShares Core S&P 500 ETF (NYSEARCA:IVV) is the ideal ETF to invest in with your Roth IRA because it is liquid enough for daily trading of millions of shares, has low fees and tracking errors, and provides higher distribution yields than its peers. Furthermore, its lower tracking error than SPY provides added peace of mind to investors using options strategies, since high tracking errors could cause costly trading mistakes.
IVV stands out by having an extremely low portfolio turnover rate of just 3%, helping reduce expenses and maximize aftertax returns. This feature is especially advantageous in volatile markets where high portfolio turnover could cause costly transactions that diminish returns over time.
Finally, it should be noted that IVV holds more technology stocks than SCHD while JEPI leans more toward consumer discretionary and industrial stocks. This may present problems when interest rates rise as it would force money away from stocks into bonds which in turn would hamper performance of certain sectors of the economy.
4. iShares Core MSCI EAFE ETF (NYSEARCA:IEFA)
Investment in international stocks can help diversify a portfolio, but selecting an ETF may prove challenging. We have your solution here!
IEFA provides broad, unbiassed exposure to developed markets outside North America. The fund tracks the MSCI EAFE Index which encompasses large and midcap companies from Europe, Australasia and Far East markets that exclude the United States. In addition, this fund features some unique aspects; weighting firms based on market cap size rather than revenue can help mitigate against small cap underperformance while its expense ratio ranks amongst one of the lowest among ETFs within this category.
ETFs can make an ideal addition to a Roth IRA’s satellite portfolio, but beware of broker charges: commission-free trading can save significant sums over time. 2022 BlackRock Inc. All rights are reserved by them and iShares(r) and the iShares logo are registered trademarks owned by BlackRock, Inc.
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