Which ETFs Are Best For a Roth IRA?
Roth IRAs offer investors an effective way to avoid taxes on capital gains while potentially reaping tax-free dividends, yet how should your savings be divided among three core categories such as stocks, bonds and global investing?
The ideal ETFs for a Roth IRA should provide broad market exposure with reduced fees and low volatility, such as:
1. Vanguard Total Stock Market ETF (NYSEARCA:VTI)
Many experts advise investing in buy-and-hold index funds such as Roth IRAs for retirement accounts. They tend to be lower-cost investments that offer superior returns compared to actively managed stocks; additionally, these portfolio diversifiers help ensure a robust retirement savings account.
VTI’s passive index strategy minimizes individual stock trades to help lower investment costs and capital gains taxes, and reduce risk and volatility across its holdings portfolio.
ETFs such as this ETF are ideal candidates for Roth IRAs as they provide broad market exposure at an economical cost, making them suitable for low risk tolerance investors with specific financial circumstances. Prior to investing, investors should conduct extensive due diligence by considering personal financial circumstances, investment goals and risk tolerance before consulting a financial advisor before making their final investment decision.
2. Vanguard Dividend Stock ETF (NYSEARCA:VDIG)
Vanguard provides an array of index funds suitable for Roth IRA investments. However, most are designed to promote price appreciation in equity markets and thus are best suited for investors willing to endure occasional price swings that occur with equity investments.
Vanguard Dividend Stock ETF, or VDIG, is one such equity-focused fund. This ETF seeks to match the performance of the S&P 500 Dividend Aristocrats Index; holding stocks with an established track record for increasing dividends over a 25-year period or longer.
Donald Kilbride and Peter Fisher currently co-manage this fund. When selecting securities to add to the portfolio, their focus is on value and quality selections with above-average potential to increase dividends over time – providing passive income generation even during bear markets.
3. Vanguard Total Bond Market ETF (NYSEARCA:VBMFX)
The Vanguard Total Bond Market ETF provides access to an investment-grade bond portfolio. The ETF invests in government, corporate, international, mortgage-backed, and mortgage-related bonds across multiple maturities; with its low expense ratio helping keep its per-share costs as low as possible.
Investors should exercise caution when investing in bond funds with high turnover rates, as they could lead to increased expenses and diminished after-tax returns. Luckily, Vanguard Total Bond Market ETF’s turnover rate falls well below the industry average and should help investors control costs and taxes more easily.
Roth IRAs provide an ideal vehicle for investing in broad stock and bond funds, which you can use as the cornerstone for building an investment portfolio that suits your specific needs and goals. Vanguard also provides index funds that track real estate investments; placing higher yielding retirement assets such as an annuity into Roth accounts can reduce tax costs in retirement.
4. Vanguard Small-Cap Stock ETF (NYSEARCA:VBSC)
Roth IRAs provide tax advantages not available through other retirement accounts. You can contribute after-tax dollars to this account, then withdraw it tax-free upon retirement.
Vanguard Small-Cap Stock ETFs track the CRSP U.S. Small Cap Index and can be traded daily like stocks. An ideal Roth choice due to their wide array of holdings containing over 1,540 stocks allowing for ample diversification opportunities.
Vanguard doesn’t charge brokerage commissions on online or phone trades of its mutual funds and ETFs or on new-issue bonds; however, you may pay more than net asset value when buying Vanguard ETF shares and receive less when selling them back; furthermore, Vanguard charges a fee on share-class conversions and some other transactions; please see their ETF Disclosure for further details. Buying other companies’ mutual funds and ETFs through your Vanguard account also waives brokerage commissions on phone trading transactions – details here.