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15 Best Performing Funds for Your 401(k)

Barbara Friedberg, Debbie Carlson

Best investments to add to your 401(k).

A 401(k) might be the best retirement wealth-building tool ever created. The account reduces taxes in the year the contribution is made and every year thereafter, until the funds are gradually withdrawn during retirement. Couple the on-going tax savings with the best 401(k) funds, and average investors can find a path to financial security. The company's 401(k) provider determines the available funds. So if one of the best performing funds isn't included in your plan, find a comparable substitute. Here are 15 funds to include in your 401(k).

Vanguard Total Stock Market Index (ticker: VTSAX)

For an investor who wants to own the entire stock market in their retirement portfolio, Alexander Voigt, CEO and founder daytradingz.com, recommends VTSAX, calling it his favorite mutual fund for 401(k) accounts. He says the expense ratio is extremely low, at 0.04%, which is $4 for every $10,000 invested annually. VTSAX has an average annual return of 7.2% since its inception in 2000 and it returned nearly 31% in 2019. "Instead of holding individual funds for specific subniches, the VTSAX covers everything in the U.S. VTSAX's low expense ratio, plus broad investment objective and above-average performance in the last decade equals the best possible choice," he says.

Vanguard Small Cap Index Admiral (VSMAX)

Dory Wiley, president and CEO at Commerce Street Holdings, says he uses index funds in sectors where it is difficult to get outperformance from active fund managers. One of his top retirement choices for small-cap holdings is VSMAX. Wiley says this fund "trounces the benchmark Russell 2000 index for the one-, three-, five-, and 10-year annualized returns." This fund is also available as an exchange-traded fund, with the ticker of VB. U.S. News ranks it at No. 5 in small-blend funds, making it one of the top performers among its category.

Fidelity Advisor Technology Fund (FADTX)

Investors interested in adding sector funds to complement core holdings could look at FADTX, says Steve Azoury, owner of Azoury Financial, who adds that this is one of his favorite funds. FADTX has given strong returns over the past 10 years. It boasts a whopping 51% one-year return, which puts it in the top quartile for its category, Azoury says. The fund is almost exclusively focused on U.S. equities, with its top holdings being Apple (AAPL), Microsoft Corp. (MSFT) and Visa (V).

Fidelity Advisor Growth Opportunities (FAGAX)

FAGAX is a large-cap growth mutual fund mostly focused on U.S. equities. It has a heavier weighting toward technology than the category average, at 38% versus 26%, and slightly more communication services companies than the average, at 18% versus 15%. It is underweight financial services firms, at 7% compared with the category average of 12.5%. The fund's biggest holdings are the giant technology names any investor would expect, such as Microsoft, but it also has UnitedHealth Group (UNH) in its top 10 holdings. Azoury says it has a very strong 10-year track record, and managed to return 14% in 2018, a year where many funds lost money. U.S. News & World Report ranks FAGAX as No. 7 in large-growth mutual funds.

Vanguard Developed Markets Index Admiral (VTMGX)

Wiley chooses VTMGX for foreign market exposure, noting the fund beat its index, the MSCI ACWI Ex-U.S. index, on both a short-term and long-term basis. This fund has a blend of holdings, so it includes some small caps with large caps. Japan, the United Kingdom and France are the top three countries in the fund, representing about 45% of the geographical weight. It's a "good place for international market exposure," Wiley says. This fund is also available as an ETF, with the ticker of VEA. U.S. News lists it at No. 18 in foreign blend funds.

Fidelity International Index (FSPSX)

Investors who are looking for a cheap international fund for their 401(k) may want to consider FSPSX, a large-cap, foreign blend fund and a choice of Jacqueline Reeves, managing director at Bell Rock Capital. The fund costs only 0.035% to hold annually, and it has a 12-month yield of 3.3%. On a one-year, three-year and five-year basis, FSPSX beat its index, MSCI EAFE. It holds large- and mid-cap stocks from 21 foreign developed markets, weighing them by market capitalization. The fund is well-diversified, holding about 900 stocks, and the top 10 holdings only accounts for 12% of the fund's assets.

DFA US Core Equity II (DFQTX)

Dejan Ilijevski, investment advisor and president at Sabela Capital Markets, says investors who have access to Dimensional Fund Advisors should consider adding those to their 401(k) portfolios. "Their holdings tilt toward the factors that are expected to have higher returns in the long run, based on decades of global, historical data, including size, value and profitability," he says. Illjevski chooses DFQTX for a total U.S. market fund. Compared to an index such as the Russell 3000, the fund overweights smaller, undervalued companies, which tend to offer higher expected returns, he adds. U.S. News ranks it No. 101 among more than 1,300 large-blend funds.

DFA International Core Equity (DFIEX)

DFIEX captures returns from developed markets outside of the U.S. "It emphasizes smaller, undervalued stocks, which we expect to provide higher returns over the long run," Ilijevski says. Like DFQTX, the fund has a smaller stock tilt versus its benchmark, MSCI World ex-USA Index. It has $34 billion in assets under management, with a low expense ratio of 0.30% annually. It has a 12-month yield of 3%, and very low turnover of just 4%, meaning that managers do little trading of holdings. With more than 5,300 stocks, it's a well-diversified fund.

DFA Emerging Markets Core Equity (DFCEX)

In emerging markets, Ilijevski picks DFCEX. Like other DFA funds, this vehicle focuses on smaller, undervalued stocks, this time in emerging markets. This fund may complement investors other emerging market holdings with its smaller stock tilt. "Over the long run, (by) tilting holdings toward proven factors that have higher expected returns, these funds have traditionally done better," he says. U.S. News ranks it No. 49 among 793 diversified emerging markets funds. Ilijevski says if its available to investors, he likes the combination of DFQTX, DFIEX and DFCEX, saying the three funds will capture equity returns from the global stock markets as together all three hold about 14,000 stocks.

American Funds Capital Income Builder (CAIBX)

Reeves likes CAIBX for retirement accounts. This world allocation fund combines both stocks and bonds in one fund, usually 70% in stocks and 25% in bonds, and attempts to produce a strong income stream. Its 12-month yield is 3.3%. The equity sleeve of this fund looks to include higher-yielding firms outside of the U.S. These firms usually pay bigger dividends than U.S. companies. For domestic equities, the fund has a heavier weight to sectors such as utilities and consumer staples. On the fixed-income side, three quarters of the fund hold high quality AAA-rated bonds.

BlackRock High Yield Bond K (BRHYX)

When looking for fixed-income funds, it can be challenging to find mutual funds with solid yields. Wiley says his choice for fixed income is BRHYX. High-yield debt is also called "junk" debt because it invests in lower quality companies for the higher yield. However, Wiley says BRHYX takes less risk while still outperforming its benchmark, the ICE BofA US High Yield Index, and has done so on both short-term and long-term time frames. He says the fund represents a "good place" to get returns in a "tough sector with lots of risk." It has a 4.4% SEC yield.

TCW Emerging Markets Income (TGEIX)

Wiley's second fixed-income suggestion for retirement plans is TGEIX. The fund is a mix of mostly government debt, at 65% of the portfolio, and 28% corporate debt, with the rest in cash and cash equivalents. It has an average credit quality of BB and mostly stays away from any lower-quality debt. "This fund has outperformed the benchmark and they do it without excessive risk concentrations in ratings, duration or high-risk countries," Wiley says. The fund has $6.7 billion in assets under management and a 4.5% SEC yield. U.S. News ranks it No.2 in the emerging markets bond funds category.

TIAA-CREF Real Estate Securities Fund (TIREX)

Even investors who own their own homes might consider adding a real estate investment fund to their 401(k). This important asset class adds a stable income stream to a diversified retirement account. When stock markets falter, real estate investments can inject stability into a portfolio. TIAA is a popular 401(k) provider and invests predominantly in U.S. real estate and can hold up to 15% in foreign real estate. Currently, the fund's holdings are 98% U.S.-based. The fund owns impressive annual five- and 10-year average returns at 9.7% and 13.7%, respectively, handily beating its category averages. The Fidelity Real Estate Investment Portfolio (FRESX) is an alternative with five- and 10-year average returns at 7.9% and 12.7%, respectively, surpassing category averages, too.

iShares CMBS ETF (CMBS)

CMBS tracks the investment results of the Bloomberg Barclays U.S. investment-grade commercial mortgage-backed securities. These investments are pools of commercial mortgages. This is a niche within the broader bond fund category. The majority of the top 10 loans are issued by the Federal Home Loan Mortgage Corp., known as Freddie Mac. The fund only holds investment-grade debt and tracks the Bloomberg Barclays U.S. CMBS (ERISA Only) Index. The fund's five-year return is 4.5% and current yield is 2.68%. The fund's one-year return of 9.49% after a stellar year for fixed income, with a low expense ratio of 0.25%. This underscores why this ETF is among the best-performing 401(k) funds.

Vanguard Intermediate-Term Corporate Bond ETF (VCIT)

This broad-based corporate bond fund, issued by low-price leader Vanguard, tracks a market-weighted index of investment-grade corporate bonds with five- to 10-year maturities. This bond fund is more broadly focused than the previous CMBS, mortgage-backed offer. VCIT also boasts one of the highest yields in its class, 3.3% yield to maturity and it has a longer effective duration compared with many of its peers. The fund sports a rock-bottom 0.05% expense ratio. The fund has $30.2 billion in assets under management and holds more than 1,800 bonds.

Consider these best-performing funds for your 401(k):

-- Vanguard Total Stock Market Index (VTSAX)

-- Vanguard Small Cap Index Admiral (VSMAX)

-- Fidelity Advisor Technology Fund (FADTX)

-- Fidelity Advisor Growth Opportunities (FAGAX)

-- Vanguard Developed Markets Index Admiral (VTMGX)

-- Fidelity International Index (FSPSX)

-- DFA US Core Equity II (DFQTX)

-- DFA International Core Equity (DFIEX)

-- DFA Emerging Markets Core Equity (DFCEX)

-- American Funds Capital Income Builder (CAIBX)

-- Blackrock High Yield Bond K (BRHYX)

-- TCW Emerging Markets Income (TGEIX)

-- TIAA-CREF Real Estate Securities Fund (TIREX)

-- iShares CMBS ETF (CMBS)

-- Vanguard Intermediate-Term Corporate Bond ETF (VCIT)



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