6 perfect ETFs to grow your IRA
Having an IRA and knowing what to do with it are two different things. When it comes to choosing your retirement investments, IRAs can be more complicated than 401 (k) – simply because many IRAs have access to the full range of exchange traded securities. It is much more difficult to choose investments from thousands of stocks and funds compared to the twenty funds available in most 401 (k).
Fortunately, you’ve come to the right place to find direction. Read on for an introduction to six exchange-traded funds (ETFs) and how each could fit into your diversified IRA portfolio.
One-stop shops: Target risk ETFs
If you want an easy, low-maintenance portfolio, a Target Risk ETF may be the way to go. While many ETFs hold all stocks or all bonds, target risk ETFs hold a stable mix of the two.
This creates efficiencies for you as a shareholder. You can be diversified between and within asset classes, while holding only one fund. Plus, you don’t have to rebalance every year to keep your stock-bond mix where you want it to be. This combination is called asset allocation and the fund manages it for you.
You can identify appropriate target risk funds by their asset allocation. Your desired asset mix should be based on your timing and risk tolerance. If you have a longer time frame and a higher tolerance for risk, you can own a high percentage of stocks. If your schedule is shorter and you are risk averse, a fairer allocation between stocks and bonds is a better strategy.
Here are two target risk ETFs from iShares with different asset allocations.
1. Aggressively allocated ETF
IShares Aggressive Core Allocation ETF (NYSEMKT: AOA) owns 80% shares and 20% bonds. This composition is suitable if retirement is still a few decades away. In strong markets, this fund should generate good growth. It is exposed to the S&P 500, mid and small caps and emerging and developing markets.
The fund’s expense ratio is 0.31% (with a reduced net expense ratio of 0.25% until 2026). It has produced average returns of around 9% over the past 10 years.
2. Growth allowance ETF
IShares Core Growth Allocation ETF (NYSEMKT: AOR) is the more conservative brother of the previous fund. The Core Growth Allocation ETF manages 60% equities and 40% bonds. It’s a good mix of assets if you’re risk averse or hoping to retire within the next 15 years.
This fund also owns small and large companies, as well as international stocks and bonds, although the weightings of these assets are quite different from those of the AOR.
AOR’s expense ratio is also 0.31% (with a reduced net expense ratio of 0.25% through 2026). The fund produced a more modest 10-year average annual return of around 7.7%. This is normal since the asset allocation is rather conservative.
Two core equity ETFs
You can also directly manage your own asset allocation by pairing fully equity ETFs with fixed income ETFs. You can get very specific with this strategy. For example, you can own a dividend fund, a real estate fund, a developing markets fund, etc. But it’s usually a good idea to choose a broad market fund as your primary equity portfolio. Below are two popular choices.
3. S&P 500 ETF
SPDR S&P 500 ETF Trust (NYSEMKT: SPY) follows the S&P 500 (SNPINDEX: ^ GSPC) index, which includes 500 of the country’s largest public companies in various economic sectors. The average annual return of the index over 10 years is 14.38%. The fund’s performance is just behind at 14.24%.
The fund’s expenses make up most of the difference in performance between the fund and the index. In this case, the fund’s expense ratio is 0.0945%, or roughly two-thirds of this performance gap. The rest usually comes from timing differences and transaction costs as the fund shifts its holdings to match changes in the index.
4. Russell 3000 ETF
IShares Russell 3000 ETF (NYSEMKT: IWV) mimics the results of the Russel 3000, an index that represents about 98% of the US stock market. The Russell 3000 Index includes companies in the S&P 500, as well as a larger group of small and medium-sized companies.
This fund does not own the 3,000 stocks in the index. Instead, the fund uses a sampling approach to track the performance of the index. Holding fewer positions is a strategy to reduce shareholder expenses.
IWV’s expense ratio is 0.20% and its 10-year average annual return is 13.6%.
Fixed income ETF
It is a good idea to moderate the risk of your equity funds with at least one fixed income fund. The safest choice is an ETF that holds US Treasury debt. Or, you can go for higher returns (and higher risk) with a corporate bond ETF. Here’s a look at each.
5.Short-term cash ETF
the Vanguard Short Term Treasury ETF (NASDAQ: VGSH) portfolio consists of approximately 90 US Treasuries with an average maturity of two years. Shorter-term debts will pay less than longer ones, but they are less sensitive to rate changes. Changes in rates inversely affect the price of bonds. When interest rates rise, bond prices fall and vice versa.
VGSH has an expense ratio of 0.05%. The fund generated 10-year average annual returns of 1.16%.
6. Corporate Bond ETFs
Vanguard Total Corporate Bond ETF (NASDAQ: VTC) tracks the Bloomberg Barclays US Corporate Bond Index, a benchmark for high quality US corporate debt. The portfolio is weighted towards intermediate maturities, but also includes short and long term debt.
The expense rate is 0.05%. VTC was launched in 2017 and has grossed around 5% per year since then. This compares to the index growth of 5.2%.
Diversify within and between asset classes
These ETFs can help you grow your IRA safely because they are well diversified. By holding a variety of stocks and bonds, you shouldn’t feel the full force of the price volatility of each position. This makes investing in retirement much more tolerable – and also more profitable.
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Catherine Brock has no position in the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.