What index funds to invest in roth ira

The 3 Best Funds to Buy for a Roth IRA

If you ask a thousand investment professionals what the best funds for a Roth IRA are, my guess is you’ll get close to a thousand different answers. Everyone looks at the task at hand slightly differently. I believe the tax-free growth of the Roth IRA means you want to carefully balance your risk/reward to ensure you have more than enough funds to withdraw in retirement

The important thing to remember about the Roth IRA is you don’t want to get too aggressive with your investments. That’s because any capital losses you incur generally cannot be deducted against profits. The only way to deduct losses from your Roth IRA is to close your Roth IRA accounts.

For today’s picks, I’ve gone with an asset allocation that isn’t the traditional 60/40 equities to fixed income but rather an even split between traditional equities, alternative assets and fixed income. This gives you a mix of mild (fixed income), medium (equities) and hot (alternatives). 

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iShares Core S&P 500 ETF (IVV)

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In 2007, Warren Buffett made a bet with New York City money management firm Protege Partners, which ran a fund that invested in hedge funds. The Oracle of Omaha bet Protege that over 10 years — from Jan. 1, 2008, to Dec. 31, 2017 — the S&P 500 would outperform a portfolio of five hedge fund of funds, net of fees and fund costs. 

Buffett chose the Vanguard version of the low-cost S&P 500 index fund. It trounced the hedge funds, delivering a 125.8% return, more than 3.5 times the performance of the average fund of funds. 

It might not seem like it when the index is down nearly 23% in 2022, but the S&P 500 is one of the best investments you can make over the long haul. As Buffett likes to say, it’s a bet on America, and he’ll take that bet every time.

Because I’ve selected a Vanguard fund for the fixed-income portion of the best funds for a Roth IRA, I’ve chosen the iShares Core S&P 500 ETF ( NYSEARCA:IVV) instead. It has roughly $280 billion in net assets invested in the index’s 503 stocks. 

The S&P 500 is a market cap-weighted index. As a result, its top 10 holdings account for more than 27% of the portfolio. If you’re into equal-weighted ETFs, you could always invest in the Invesco S&P 500 Equal Weight ETF (NYSEARCA:RSP) instead. However, it charges a management fee of 0.2%, 17 basis points more than IVV, so you’ll pay $1.70 more in fees per $1,000 invested.

IVV is one of the best funds for a Roth IRA and really ought to be a foundational piece of any well-constructed portfolio.

Invesco Global Listed Private Equity ETF (PSP)

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The next selection for the best funds for a Roth IRA is likely controversial. However, there is a method to my madness. Many of the biggest institutional investors in the world use alternative assets for an increasingly significant portion of their portfolios.

According to the Yale Investment Office, which manages Yale University’s Endowment Fund: “In 1989, nearly three-quarters of the Endowment was committed to U.S. stocks, bonds, and cash. Today, domestic marketable securities account for less than one-tenth of the portfolio, while foreign equity, private equity, absolute return strategies, and real assets represent over nine-tenths of the Endowment.”

Try as you will, it’s not easy for the average Roth IRA investor to find ways to successfully invest in alternative assets while maintaining a level of diversification appropriate for a retirement portfolio. Sure, you can find real estate and infrastructure ETFs to invest in. However, the Invesco Global Listed Private Equity ETF (NYSEARCA:PSP) gives you exposure to a veritable smorgasbord of alternative assets through the global private equity firms that manage these alternative assets.

I’ll grant you the fees are out-of-this-world high for an ETF. PSP charges a management fee of 0.5%, other fees of 0.15%, and acquired fees and expenses of 0.69% for the funds the ETF invests. In total, that’s an expense ratio of 1.34%, or $13.40 per $1,000 invested. 

PSP isn’t cheap, but it should provide investors with better performance over the long haul than the traditional 60/40 allocation to equities and fixed income.

Vanguard Total Bond Market ETF (BND)

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Vanguard Total Bond Market ETF (NASDAQ:BND) is part of the intermediate-term bond category. It tracks the performance of the Bloomberg U.S. Aggregate Float Adjusted Index.  According to the fund’s prospectus, “This Index measures the performance of a wide spectrum of public, investment-grade, taxable, fixed income securities in the United States — including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities — all with maturities of more than 1 year.” 

BND has more than $270 billion in total net assets invested across more than 10,000 bonds. These bonds have an average effective maturity of 8.9 years, an average coupon of 2.7%, and a yield to maturity of 4.7%.

Approximately 67% of the ETF is invested in U.S. government Treasury bills. That’s the highest quality fixed-income security you can own. The remaining 33% of the portfolio is invested in investment-grade bonds rated BBB or higher. Best of all, the management expense ratio is just 0.03%, or 30 cents per $1,000 invested. 

Year to date, BND is down 18%, which isn’t great, but it’s better than the S&P 500’s 22.5% drop. 

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.

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