Top retirement funds for millennials.
Time is one of the key advantages for millennials who are saving for retirement. Born in the early 80s through the mid-90s, they can weather market volatility better than investors closer to retirement. Millennials can even be well served by market downturns because dips offer buying opportunities. But many funds that target a specific date for millennial retirement and shift focus from stocks to bonds on a preset path may not be the best 401(k) investments for everyone. For those who want to take a more DIY approach, here's a look at some of the top mutual and exchange-traded funds for millennial retirement savings.
DoubleLine Shiller Enhanced CAPE (DSEEX)
Patrick McDowell, portfolio manager at Arbor Wealth Management in Destin, Florida, recommends millennials saving for retirement build their own set of funds rather than being content with a target-date fund. His pick is DSEEX, which invests in the cheapest sectors among large-cap stocks. Although the fund can be complicated to understand, McDowell likes its rules-based strategy because it doesn't rely on stock-picking prowess. As long as the general equity market continues to do well, McDowell says he thinks the fund will outperform the U.S. stock market over time. DSEEX has gained nearly 15% annually over the past five years and has a net expense ratio of 0.57%, which is below its category average.
Fidelity Advisor Technology Fund Class A (FADTX)
If there's one thing millennials like, it's technology. As long as coffee shops are packed with mobile workers on their smartphones and laptops connected to the cloud, it stands to reason that investing in tech companies could be a good bet. But the sector can also be risky. For the best 401(k) investment funds in tech, Steve Azoury, owner of Azoury Financial in Troy, Michigan, says one of his favorites is the broad FADTX. Azoury likes that the fund doesn't go after new upstarts but invest in names he's comfortable with such as Apple (AAPL) and Microsoft (MSFT). FADTX has returned more than 18% annually over the past decade and has a net expense ratio of 1.03%, which is below its category average. That said, there is a 5.75% front load.
Vanguard Total World Stock ETF (VT)
Broad diversification is something to consider when looking for the best 401(k) investments for millennials. "The best 401(k) options are probably not going to be the most exciting things," says John Cunnison, chief investment officer at Baker Boyer Bank. In that vein, Brian Bruggeman, financial planning manager at the Washington-based company, likes VT. "It's a totally 'set it and forget it' stock fund," he says, adding that it is a cheap and easy way to own a big chunk of the stock market. VT has returned more than 9% annually over the last decade, with an expense ratio of 0.09%, which is below its category average.
Alpha Architect U.S. Quantitative Momentum ETF (QMOM)
A big diversified fund like VT might not be able to capture momentum, which Bruggeman describes as the tendency for stocks that are going up in the short term to keep going up. To take advantage of this phenomenon, Bruggeman recommends QMOM, which is much more concentrated than VT and, according to data provider FactSet targets 10% of equities with the best total return over the last year, excluding the most recent month. "It would be the exciting part of somebody's portfolio," Bruggeman says. "Millennials still want some sort of stock-picking fix." QMOM has returned more than 10% annually over the past three years and has an expense ratio of 0.49%, which is above its category average.
Alpha Architect US Quantitative Value ETF (QVAL)
QMOM's value-oriented cousin is QVAL, a concentrated fund that can serve as a timeline diversifier because momentum- and value-focused investing strategies tend to beat the market at different times, Cunnison notes. Momentum stocks that are winning and keep winning tend to do so late in expansionary business cycles while value stocks tend to do better during economic downturns, Bruggeman says. The economy is still in an expansionary part of the cycle, perhaps explaining why this fund hasn't returned much over the last half-decade. QVAL has only returned about 2% annually over the past five years and has an expense ratio of 0.49%, which is above its category average.
Vanguard Total International Stock Index Fund Admiral Shares (VTIAX)
With a long time to invest, millennials saving for retirement can afford to take more risks in hopes of getting more rewards. For aggressive savers, Christine Benz, Morningstar's director of personal finance, created a model portfolio that skews toward small- and mid-cap equities and foreign stocks. Indeed, the largest holding in this portfolio is VTIAX, which makes up 33% of the holdings. Given the portfolio's aggressive cast, she says: "I would expect it to perform better than the broad market during strong equity environments and worse on the downside." For VTIAX specifically, the fund's performance has suffered as foreign stocks have been drastically underperforming U.S. equities, Benz notes. It has returned about 3.5% annually over the past five years and has an expense ratio of 0.11%, lower than its category average.
Primecap Odyssey Growth Fund (POGRX)
Perhaps unsurprisingly for a portfolio devoted to aggressive savers who can afford to wait out some volatility, Benz's contains a fund devoted to growth -- POGRX, which makes up 20% of her model portfolio. "Nearly all portfolios for investors in accumulation mode will be stock-heavy, because longer time horizons mean these investors have time to ride out bad markets," Benz writes. POGRX falls within Morningstar's large-growth category, which includes funds that invest in large-cap domestic equities that are expected to grow faster than other large-cap stocks. POGRX has returned nearly 14% annually over the past 10 years and has a net expense ratio of 0.64%, which is below its category average.
Vanguard Total Stock Market Index ETF (VTI)
For those not wanting mutual funds like VTIAX or POGRX, Benz created a similar aggressive model portfolio for those preferring to go the all-ETF route. The largest holding in the model portfolio at 50% is VTI, which is one of the most popular options for investors looking for a one-stop-shop with which to buy the market. This fund offers broad diversification, which Benz writes is the best way to keep costs low. VTI has returned more than 9% annually over the past 15 years and has an expense ratio of just 0.03%, which is below its category average.
Fidelity Advisor New Insights Fund (FNIAX)
For an all-purpose equity fund, Azoury likes FNIAX. Its diversification -- which includes holdings in financial services firms, consumer products companies and technology businesses -- means the fund can be resilient even if one industry does poorly, he says. Azoury also notes FNIAX's strong performance. Because it is primarily invested in U.S. equities, the fund has been able to benefit along with the bull run in domestic stocks that began in 2009. The fund has returned more than 13% annually over the past decade and has a net expense ratio of 1.05%, which is average for the category. Keep in mind that it also charges a 5.75% front-load fee.
Nine best retirement funds for millennials:
-- DoubleLine Shiller Enhanced CAPE (DSEEX)
-- Fidelity Advisor Technology Fund Class A (FADTX)
-- Vanguard Total World Stock ETF (VT)
-- Alpha Architect U.S. Quantitative Momentum ETF (QMOM)
-- Alpha Architect US Quantitative Value ETF (QVAL)
-- Vanguard Total International Stock Index Admiral (VTIAX)
-- Primecap Odyssey Growth Fund (POGRX)
-- Vanguard Total Stock Market Index ETF (VTI)
-- Fidelity Advisor New Insights Fund (FNIAX)
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