3 Top Index Funds for Your IRA
It can be tough picking the right stocks to buy, and tracking individual stocks requires a significant investment in time that many people can't afford to make. Instead of trading in individual stocks, it can make sense to buy shares in index ETFs that own lots of stocks instead of a very few. We asked top Motley Fool contributors to tell us what index fund ETFs they'd recommend buying now, and they came back with the iShares Core S&P Mid-Cap ETF (NYSEMKT: MDY), the Vanguard FTSE Emerging Markets ETF (NYSEMKT: VWO), and the Vanguard Total Stock Market (NYSEMKT: VTI). Read on to learn why they like these funds right now -- and if they're right for your portfolio.
Not too big. Not too small. This index fund is just the right size!
Sean Williams (iShares Core S&P Mid-Cap ETF): Investors are usually torn when investing for the long- or ultra-long-term in an IRA. They want stability and income potential, which is most often found in larger companies, but they also want the opportunity for share-price appreciation that's most often seen with smaller, faster-growing companies. How to resolve this? Why not choose the middle ground with the iShares Core S&P Mid-Cap ETF?
IMAGE SOURCE: GETTY IMAGES.
Why mid-cap stocks? They offer the best of both worlds. Small-cap stocks bring greater risks to the table in terms of funding issues or perhaps an unproven business model. Meanwhile, large stocks don't offer much in the way of growth. Mid-caps have a nice blend of growth and business stability, walking the line that allows investors to generate some income and see the value of their investment rise over time. In fact, the iShares Core S&P Mid-Cap ETF has outperformed other mid-cap category index funds over the one-, three-, and 10-year marks, and it's done so with a minuscule annual expense ratio of 0.07%. It also offers a reasonable 1.4% yield.
This index fund is also well-diversified, with 400 holdings as of Nov. 17, 2017, and no holding accounting for more than 0.78% of total portfolio weighting. What's more, there's a diverse sector breakdown, with 18.2% of funds tied up in fast-growing information technology, and 16.8% in more foundational financial stocks.
If you're looking for an index fund to set and forget for decades, I'd suggest taking a closer look at the iShares Core S&P Mid-Cap ETF.
IMAGE SOURCE: GETTY IMAGES.
Time to broaden your horizon
Todd Campbell (Vanguard FTSE Emerging Markets ETF): A rip-roaring stock market may have you wondering if there are any value stocks left to buy. The answer is yes if you're willing to look beyond the U.S. market and buy foreign stocks.
A lot of economies overseas have suffered from recessions more recently than the U.S. and as a result, international stock returns have lagged over the past five and 10 years. The gap in returns, though, is shrinking now that economies overseas are recovering and foreign companies are growing earnings more quickly than U.S. companies.
A return to earnings growth has led to international stocks outperforming U.S. stocks this year, but I think there could still be plenty more room left for these stocks to climb higher, because the price to earnings ratio of foreign stocks remains comparatively low. For example, Vanguard's FTSE Emerging Markets ETF has a forward price to earnings ratio of just 14.6, and that's significantly lower than the S&P 500's ratio.
Vanguard's FTSE Emerging Markets ETF (VWO) vs. S&P 500 (SPY) | |||
|---|---|---|---|
Year-to-Date Return | 5-Year Avg. Return | Forward P/E Ratio | |
VWO | 27.20% | 4.89% | 14.6 |
SPY | 16.70% | 15.94% | 21.1 |
Author's chart.
Not all of the foreign stocks owned by this ETF are beaten-up bargains. For instance, the biggest holding is Tencent Holdings Ltd (NASDAQOTH: TCEHY), and that stock has doubled this year. Nevertheless, this is a very diversified ETF that owns stock in more than 4,000 companies, and the top 10 holdings represent only 17% of the portfolio.
As long as global economies continue picking up steam, earnings should continue growing, especially in emerging markets that benefit from an expanding middle class. Since stocks tend to follow earnings over time, this ETF could generate returns that beat the S&P 500 as more investors warm up to foreign stocks.
Admittedly, owning foreign stocks has historically been riskier than owning U.S. stocks, but I think adding an overseas ETFs like this one to portfolios can pay off over the next few years. It doesn't hurt that the Vanguard FTSE Emerging Markets ETF yields an S&P 500-beating 2.28%, either!
One and done
Brian Feroldi (Vanguard Total Stock Market): If you're the type of investor who likes to keep things simple, then it makes sense to buy a broadly diversified index fund that owns a little bit of everything. If that sounds appealing, then I'd advise you to give the Vanguard Total Stock Market index fund a closer look.
As its name suggests, this fund owns a small piece of just about every publically traded company on the U.S. stock market. This includes mega-large caps like Apple, Microsoft, and Alphabet all the way down to tiny micro caps. In total, this one fund offers investors exposure to about 3,600 U.S. companies.
Like most Vanguard products, this fund is dirt-cheap to own and is also extremely tax efficient. The fund carries an expense ratio of just 0.04%, making it one of the lowest-cost ETFs on the market. What's more, the fund's turnover ratio last year was just 4%, so its owners won't be stuck paying a hefty tax bill each year. Income investors will also appreciate that this fund offers up a juicy dividend yield of 1.8%.
If you're looking for a cheap and easy way to gain maximum diversification to the U.S. markets, then the Vanguard Total Stock Market ETF should be right up your alley.
More From The Motley Fool
6 Years Later, 6 Charts That Show How Far Apple, Inc. Has Come Since Steve Jobs' Passing
Why You're Smart to Buy Shopify Inc. (US) -- Despite Citron's Report
Brian Feroldi has no position in any of the stocks mentioned. Sean Williams has no position in any of the stocks mentioned. Todd Campbell has no position in any of the stocks mentioned. His clients may have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
