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The 8 Best 401(k) Funds for Millennials

Rebecca Lake

Top retirement funds for Gen Y.

Millennials' first experience with investing is often through an employer's retirement plan. The challenge for beginning investors lies in determining how to invest these contributions for maximum returns, while balancing risk and cost in the equation. "Most company-sponsored 401(k) plans have a given lineup of funds," says Jirayr Kembikian, managing partner at Citrine Capital in San Francisco. The younger crowd is sometimes quick to choose safe vehicles like cash, Kembikian says, but "it's important for millennials to invest in growth-oriented funds." Here are eight funds that are the best 401(k) investments to consider for long-term investing.

Dimensional 2055 Target Date Retirement Income Fund (ticker: DRIKX)

Target-date funds adjust the asset allocation automatically over time as investors draw closer to their target retirement date. Kembikian says target-date funds offered by Dimensional Fund Advisors are a good choice for millennials because "they offer low-cost expense ratio funds that can provide a diversified long-term solution." DRIKX, designed for those retiring in 2055, is composed of global equity, global bonds and inflation-protected bonds. While the fund reported a negative return for 2018, DRIKX has generated an annualized return of 7.79 percent since its inception in November 2015. It has a relatively low-net expense ratio of 0.27 percent, which may be attractive to cost-conscious millennials.

SPDR Portfolio Developed World Ex-US ETF (SPDW)

"There's a tendency for investors to concentrate in stocks in their own countries, called home country bias" says Brandon Renfro, a fee-only financial advisor and assistant professor of finance at East Texas Baptist University in Marshall, Texas. He says SPDW, which tracks the S&P Developed Ex-U.S. BMI Index, allows millennials to diversify internationally within their 401(k) to reduce this bias. But investing in developed countries beyond the U.S. introduces a key risk factor. "Each country has its own political environment and if they invest in a company in a different country, there's a chance that changing laws could impact those investments in a negative way," he says.

DoubleLine Shiller Enhanced CAPE (DSEEX)

Patrick R. McDowell, research analyst and portfolio manager at Arbor Wealth Management in Florida, says DSEEX isn't necessarily the easiest investment to understand, but "it's the best mutual fund a young person with a 10-plus year time horizon could own in a 401(k) account." The fund's objective is a total return exceeding the Shiller Barclays CAPE US Sector USD Index. McDowell says DSEEX rebalances sectors of the market, based on what's cheapest using the CAPE ratio, which represents a cyclically adjusted price-to-earnings ratio. The fund has delivered a 13.71 percent annualized return since its inception in October 2013 and McDowell says there's a strong likelihood it will continue to outperform the S&P 500.

Reality Shares Nasdaq NexGen Economy ETF (BLCN)

BLCN invests in publicly traded companies that have a stake in the blockchain ecosystem. Kian Salehizadeh, senior analyst at Blockforce Capital in San Diego, says blockchain has huge potential as a disruptor across numerous industries and its reach is only going to expand. "BLCN represents an opportunity for millennials to get in on the ground floor of an emerging technology," he says. On the risk side, Salehizadeh acknowledges that because blockchain is new, investors are taking more of a chance, but says that's what makes it an ideal investment for millennials. "Their risk appetites are typically greater due to their longer-term investment horizons," he says, which could be suited to a 401(k) investing strategy for younger investors.

Vanguard Small Cap Value Index Fund (VSIAX)

Vanguard has a solid reputation for offering low-cost funds with strong performance records. VSIAX concentrates on smaller domestic companies, offering millennial investors value stocks through its 401(k). Cost-wise, it's hard to find a better bargain; the fund's expense ratio is a low 0.07 percent. VSIAX covers a broad scope of sectors, including consumer goods, technology, health care and financials, with the largest allocation in financials. Since inception in September 2011, the fund has been on a relatively steady upward trajectory, with an average annual return of 13.67 percent through January 2019.

Fidelity Advisor Growth Opportunities Fund (FAGAX)

FAGAX has a five-star rating from Morningstar and favors a large-growth investment style. Steve Azoury, owner of Azoury Financial in Troy, Michigan, says FAGAX is a favorite pick for millennial 401(k) investors looking for an alternative to target-date funds. "Target-date funds can short-change you as to the one-size-fits-all theory," he says, preferring domestic large-cap growth funds that represent the companies and brands people use regularly for younger investors. "In looking at the top holdings in the funds, people don't seem to fear the stock market as much," Azoury says. FAGAX fits the bill, with an asset allocation that includes Microsoft (MSFT), Amazon (AMZN) and Apple (AAPL).

SPDR Dow Jones Industrial Average ETF (DIA)

DIA is an ETF that tries to match the performance of the Dow Jones Industrial Average, which is composed of 30 blue-chip domestic stocks. Scott Brown, professor of finance at the University of Puerto Rico Graduate School of Business, says it's a good choice for millennials because it's not an overdiversified fund. "According to academic research, investors don't need to hold more than 30 stocks to be fully diversified," Brown says, "and because time is on a millennial's side, DIA has the opportunity to grow substantially in a relatively low-risk way."

ROBO Global Robotics & Automatic Index ETF (ROBO)

ROBO offers global diversification through investments in companies leading the robotics and artificial intelligence charge. "The growth curve for robotic and AI applications and technologies is accelerating," says Chris Buck, head of client execution services at ROBO Global. "The combination of earnings growth, industry growth and rapid innovation is a sound recipe for wealth creation." Through mid-February 2019, ROBO outperformed the iShares MSCI ACWI ETF (ACWI) by 18.5 percent cumulatively over the past five years, he says. Buck adds this is just the beginning and ROBO could be a sound choice for millennial 401(k) investors over the long term.

8 top retirement funds for millennials.

To recap, eight of the best 401(k) funds for millennials are:

-- Dimensional 2055 Target Date Retirement Income Fund (ticker: DRIKX)

-- SPDR Portfolio Developed World Ex-US ETF (SPDW)

-- DoubleLine Shiller Enhanced CAPE (DSEEX)

-- Reality Shares Nasdaq NexGen Economy ETF (BLCN)

-- Vanguard Small Cap Value Index Fund (VSIAX)

-- Fidelity Advisor Growth Opportunities Fund (FAGAX)

-- SPDR Dow Jones Industrial Average ETF (DIA)

-- ROBO Global Robotics & Automatic Index ETF (ROBO)

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