There are a variety of tax-advantaged saving plans for U.S. investors to save for retirement. These include 401(k) accounts, IRAs, and Roth IRAs. Many investors favor a Roth IRA because, while they are funded with after-tax dollars, the money can be withdrawn on a tax-free basis provided certain conditions are met.
Like other retirement accounts, Roth IRAs are used largely for long-term buy-and-hold investing. A primary reason for this approach is that retirement accounts are designed to accumulate wealth over the long term for retirement. So people investing in a Roth IRA typically have a similar long-term time horizon.
Given this approach, Roth IRA investors may be best off by selecting a small number of inexpensive core funds to provide a broad exposure to multiple asset classes. Three categories that together offer this type of broad exposure are U.S. stocks, bonds, and global investing. One way for investors to gain exposure to these three categories is exchange-traded funds (ETFs), which are a type of pooled investment security that operates much like a mutual fund. But unlike mutual funds, ETFs can be purchased or sold on a stock exchange the same way that a stock can. For this story, we will look at the best ETFs in each of these categories. ETFs are especially appropriate investment vehicles to consider for Roth IRAs because these funds are typically designed to be low-cost and diverse.
- Roth IRAs are tax-advantaged retirement accounts appropriate for long-term investment strategies.
- Three categories that together offer Roth IRA investors broad exposure are: U.S. stocks, bonds, and global investing. Exchange-traded funds are a good way for investors to gain exposure to these three categories.
- The best U.S. stock ETFs for Roth IRAs are funds in a seven-way tie: IVV, VOO, SPLG, SPTM, ITOT, VTI, and BKLC.
- The best bond ETF for Roth IRAs is BKAG.
- The best global investing ETF for Roth IRAs is SPDW.
Investopedia's methodology for selecting the best ETFs for Roth IRAs was based on a search of ETF Database for funds that trade in the U.S., and then for funds tracking major market indexes for each of three categories: U.S. stocks, bonds, and global investing. All data below is as of March 13, 2022, except where indicated.
Best U.S. Stock ETF(s) for Roth IRAs: Multi-Way Tie
- Best S&P 500 ETFs: iShares Core S&P 500 ETF (IVV), Vanguard S&P 500 ETF (VOO), SPDR Portfolio S&P 500 ETF (SPLG)
- Best total market ETFs: SPDR Portfolio S&P 1500 Composite Stock Market ETF (SPTM), iShares Core S&P Total U.S. Stock Market ETF (ITOT), Vanguard Total Stock Market ETF (VTI)
- Morningstar U.S. Large Cap ETF: BNY Mellon U.S. Large Cap Core Equity ETF (BKLC)
The funds listed above represent some of the best U.S. stock ETFs across subcategories including the S&P 500 Index and total market exposure. All of the funds listed above have an expense ratio of 0.03%, except for BKLC, which has an expense ratio of 0.00%.
Common index fund providers have engaged in a major price war in recent years to entice customers. That means investors luckily have access to a large number of extremely inexpensive ETFs. In addition to offering similarly low prices, the stock funds listed above are in a seven-way tie because the general options they offer investors are similar. That means an investor's choice may come down to which of these funds is most easily available based on their preferred broker.
As mentioned, some of the funds above track slightly different indexes across subcategories. Investors should decide if they want to track the S&P 500, which is exclusively large-cap stocks, or a total or broad market index which offers more exposure to small- and mid-cap stocks. The latter may bring a bit more volatility to portfolios but also adds diversification.
The final fund listed above, BKLC, is notable because it is a zero-cost fund. It tracks a significantly smaller index of large-cap stocks, with just under 229 holdings compared to over 500 for the S&P 500. Still, those roughly 200 stocks make up about 70% of available market cap, whereas the S&P 500 makes up about 80%. As a result, the difference in exposure is not as large as it may appear to be. Still, investors have reason to be cautious about BKLC. It launched in 2020, meaning that it is largely untested, and it is unclear how this relatively smaller portfolio will perform over a longer term.
Best Bond ETF for Roth IRAs: BKAG
- Expense Ratio: 0.00%
- Assets Under Management: $256.5 million
- 1-year trailing total return: -2.35%
- 12-month trailing yield: 1.61% (as of Mar. 11, 2022)
- Inception date: April 22, 2020
The BNY Mellon Core Bond ETF (BKAG) aims to track the performance of the Bloomberg Barclays US Aggregate Total Return Index, which offers broad exposure to the overall U.S. bond market. The passive ETF's primary portfolio managers are Gregory Lee and Nancy Rogers, who have managed the fund since it was founded in 2020.
As of Feb. 28, 2022, BKAG has roughly 2,112 holdings with a weighted average maturity of 8.69 years. Broken down by industry as defined by BNY Mellon, about 40.31% of the portfolio is Treasurys, followed by 27.79% agency fixed rate, with the remaining third in banking, consumer non-cyclical, communications, tech, and other areas. All of the ETF's bonds are investment-grade, including: 72.71% rated AAA, 14.72% BBB, with the remainder of the portfolio made up of AA and A debt.
Bonds and stocks work together in a portfolio to manage risk, with bonds generally considered to be less risky than stocks. The proportion of each will depend on factors including how far an investor is from retirement and how risk-averse that investor is. The traditional investing approach has been to build a portfolio with 60% stocks/40% bonds. But many investors recently have advised allocating a larger percentage of a portfolio to stocks. The thought is that a higher percentage of stocks will increase performance while only slightly increasing risk for most of an investor's career, unless that investor is quite close to retirement. For this reason, many investors allocate only 10% or less of a portfolio to bonds while young, and even only 10% to 20% into middle age.
Best Global Investing ETF: SPDW
- Expense Ratio: 0.04%
- Assets Under Management: $12.0 billion
- 1-year trailing total return: 1.84%
- 12-month trailing yield: 3.24%
- Inception Date: April 20, 2007
The SPDR Portfolio Developed World ex-US ETF (SPDW) aims to track the S&P Developed Ex-U.S. BMI Index, an index comprised of publicly traded companies domiciled in developed countries outside the United States. As of March 13, 2022, the fund has 2,409 holdings. 17.47% of the invested funds are allocated to financials stocks, followed by 16.07% to industrials and 10.79% to consumer discretionary names. Japan-based stocks make up 21.6% of the fund's portfolio, by far the largest share, followed by the U.K., Canada, France and Switzerland.
Global investing funds help to diversify a portfolio so that an investor need not rely exclusively on the U.S. economy. If the U.S. is not doing well, investing in other countries that are growing can help a portfolio to better weather the volatility.
SPDW was tied with the BNY Mellon International Equity ETF (BKIE) according to Investopedia's methodology. However, SPDW has significantly better liquidity, meaning that trading costs are potentially lower. But, BKIE still may have enough liquidity for most small investors. So if your preferred broker offers that fund instead of SPDW, it may be one option worth considering. Both funds are limited to developed markets, which are generally less risky and volatile than emerging market stocks. If you are looking for a global investing fund that includes both developed and emerging markets around the world, the cheapest option is the Vanguard Total World Stock ETF (VT).
U.S. stocks and bonds ETFs provide a balance of risk and stability to a Roth IRA portfolio, while global investing funds diversify a portfolio beyond the U.S. in case of U.S. economic turmoil. ETFs, which trade like stocks and are generally low cost, are an efficient way for investors to access these large investment categories. Regarding stock ETFs, there are seven equities funds that are tied as being the best choice for a Roth IRA. The best bond ETF for Roth IRAs is BKAG, while the best global investing ETF is SPDW. Buying one fund from these three categories will enable Roth IRA investors to maximize returns over the long term while limiting risk.