The Roth IRA is one of the most popular retirement vehicles. While Roth IRAs are funded with post-tax income, the popularity of these products stems from the fact that future withdrawals are not taxed.
“Roth IRAs make the most sense if you expect your tax rate to be higher during retirement than your current rate,” according to RothIRA.com. “That makes Roth IRAs ideal savings vehicles for young, lower-income workers who won’t miss the upfront tax deduction and will benefit from decades of tax-free, compounded growth.”
Straightforward investments such as individual stocks, bonds, exchange-traded funds (ETFs), index funds and mutual funds are suitable for Roth IRAs, but some asset classes are not conducive to inclusion in Roth IRAs. For example, cash investments like money markets probably should not be included in Roth IRAs nor should funds with high acquired costs and fees.
Here are seven of the best ETFs and index funds to consider for Roth IRA inclusion this year.
Schwab U.S. Dividend Equity ETF (SCHD)
Expense Ratio: 0.07% per year, or $7 on a $10,000 investment.
Given that Roth IRAs are designed to be long-term investment vehicles, it makes sense that investors add some dividend stocks or funds to their Roth IRA rosters. And knowing that assets in a Roth IRA are bound to be held for lengthy holding periods, saving on ETF or index fund fees is pivotal.
Among dividend funds, the Schwab U.S. Dividend Equity ETF (NYSEARCA:SCHD) is one of the least-expensive options to consider. The $7.60 billion SCHD follows the Dow Jones U.S. Dividend 100-Index, which features domestic dividend payers with minimum dividend increase streaks of 10 years. SCHD holds just over 100 stocks.
Dividend growth strategies and funds often feature stocks with quality hallmarks and SCHD is no exception. The fund devotes 43.5% of its weight to consumer staples and technology stocks. Consumer staples has a rich tradition of growing dividends and offering above-average yields while the technology sector has been one of the most prodigious dividend growth groups in recent years. Those traits, among others, make SCHD ideal for inclusion in Roth IRAs.
Vanguard Value ETF (VTV)
Expense Ratio: 0.05%
While the value factor struggled mightily over the course of the recent U.S. bull market, historical data suggests value stocks usually perform well, if not outperform over long holding periods. That combined with its low fee make the Vanguard Value ETF (NYSEARCA:VTV) an ideal addition to Roth IRA lineups.
VTV is one of the largest and least expensive value ETFs and therefore also one of the largest and cheapest smart beta funds in the U.S. The fund holds 344 domestic stocks with the value designation and it tilts heavily toward large-caps names as highlighted by a median market value of $89.3 billion among its holdings.
While this potential Roth IRA addition is a value fund, many of its holdings qualify as low volatility or quality stocks or both. The possible near-term hindrance to VTV is its 23.5% weight to financial services, but that sector is rallying to start 2019.
iShares Edge MSCI USA Momentum Factor ETF (MTUM)
Expense Ratio: 0.15%
Momentum is another investment factor that has impressive long-term returns, but as 2018 showed investors, momentum stocks can be volatile and their fortunes can change abruptly. However, allocating a portion of one’s Roth IRA to a momentum fund rather than stock picking among momentum names can smooth out some of volatility associated with momentum fare.
Enter the iShares Edge MSCI USA Momentum Factor ETF (BATS:MTUM). The $8.1 billion MTUM “seeks to track the performance of an index that measures the performance of U.S. large- and mid-capitalization stocks exhibiting relatively higher momentum characteristics, before fees and expenses,” according to iShares.
Investors typically think of momentum strategies as being heavy on technology and consumer discretionary names, and that is the case with MTUM as the fund devotes almost 45% of its weight to those sectors. However, factor-based funds are usually sector agnostic and that is true of this fund. Its sector weights can shift as momentum improves or declines through the various sectors. The fund also devotes over a quarter of its weight to the healthcare sector.
iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD)
Expense Ratio: 0.15%
Although Roth IRAs are long-term vehicles, even risk-tolerant investors should include some fixed-income exposure. Rather than relying on slower-moving, lower-yielding Treasuries, Roth IRA investors can boost their income profiles with investment-grade corporate bonds. The iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEARCA:LQD) is the largest corporate bond ETF in the U.S.
LQD holds nearly 2,000 corporate bonds and has a 30-day SEC yield 4.3%, well above what investors will find with 10-year Treasuries or on the S&P 500. Roth IRA investors can ride out some of the risks associated currently associated with corporate bonds.
There is some interest rate risk with LQD, as the fund’s duration is 8.27 years. Moreover, roughly half of the fund’s holdings are rated BBB, the investment-grade spectrum that is closest to junk territory. That group is also viewed as increasingly vulnerable to credit downgrades.
“Historically, investment-grade corporates with BBB ratings perform relative to other corners of the corporate bond market, but those bonds delivered losses last year, heightening concerns about fragile grasps on investment-grade ratings heading into 2019,” according to ETF Trends.
ProShares Russell 2000 Dividend Growers ETF (SMDV)
Expense Ratio: 0.4%
As noted earlier, dividends merit strong consideration for Roth IRAs. The same is true of small-cap stocks. The combination of dividends and small caps available via the ProShares Russell 2000 Dividend Growers ETF (BATS:SMDV) is a potentially potent one for Roth IRA investors.
SMDV tracks the Russell 2000 Dividend Growers Index, the dividend growth derivative of the famous Russell 2000 Index. SMDV’s underlying index requires member firms to have minimum dividend increase streaks of at least a decade. That trait is something of a rarity in the small-cap space and as such, SMDV holds just 61 stocks. However, the fund can help investors mitigate some of the volatility associated with smaller stocks.
“According to Harnessing the long-term potential of dividend growth, a new report from FTSE Russell, the Russell 2000 Dividend Growth Index had an annualized return of 11.8% from June 1998 through December 2018, versus 7.6% for the Russell 2000 Index,” said FTSE Russell in a recent note. “And these returns were achieved amid a respective annualized volatility of 15.1% and 19.6% for the same period. More return for less risk resulted in a significantly higher return/risk ratio of 0.78 for the Russell 2000 Dividend Growth Index.”
Invesco QQQ (QQQ)
Expense Ratio: 0.2%
The Invesco QQQ (NASDAQ:QQQ) is ideal for younger Roth IRA investors with the benefits of time and higher risk tolerance. One of the most venerable broad market ETFs in the U.S., QQQ tracks the Nasdaq-100 Index and is known for being a reliable proxy on the technology sector without being a dedicated technology ETF.
For investors looking to add some growth names to their Roth IRAs, QQQ is an efficient way of doing just that, as about 62% of the fund’s holdings are classified as growth stocks.
Invesco S&P 500 Equal Weight ETF (RSP)
Expense Ratio: 0.2%
Many so-called experts will tell investors only to add prosaic, cap-weighted funds to Roth IRAs. The long-term performance of the Invesco S&P 500 Equal Weight ETF (NYSEARCA:RSP), the largest equal-weight ETF in the U.S., indicates Roth IRA investors could miss out on some impressive returns by solely focusing on cap-weighted strategies.
As its name implies, RSP is an equal-weight ETF and none of its 505 holdings command weights of more than 0.25%. Equal-weight strategies often thrive due to exposure to the size or value factors. In RSP’s case, it is more a case of the latter because the fund features scant small-cap exposure but does devote over 40% of its weight to value stocks.
Since inception and over the past decade, RSP has outperformed the cap-weighted S&P 500, according to issuer data.
As on this writing, Todd Shriber does not own any of the aforementioned securities.
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