The Top 5 ETFs for your 2017 IRA

The Top 5 ETFs for Your IRA

Are you ready to to finally start investing in 2017? It can be daunting for first-timers, certainly. But with a little guidance and a lot of knowledge, it should be easier than ever to start investing in your future.

When investing, our mantra is “Maximum Return from Minimal Fees.” Fees are the #1 factor that eat away at your investment. As we’ll see, the funds we’ve chosen are some of the most affordable out there. By picking these, or similar, you’ll get your piece of the pie that is the U.S. economy.

Should I pick a Roth IRA or Traditional IRA?

In order to maximize our return on investment, we must also take into account taxes. Taxes are what make society function, and we should all pay our fair share. No more than our fair share, of course. Uncle Sam gives us a break by being able to save and invest in IRAs (Individual Retirement Accounts). They come in Traditional and Roth flavors. You’ll need to speak with a tax professional to decide which works best for you. Basically, a Traditional IRA lets you deduct contributions when you file your taxes, but then you are taxed on your withdrawals during retirement. On the other hand, with a Roth IRA, you cannot deduct your contributions when you file taxes, but distributions in retirement age are not taxed. As of this writing, we are allowed to contribute up to $5,500 per year to a Traditional/Roth IRA. That works out to about $15 per day. Surely, you can save $15 per day for your retirement? Try skipping a latte or two once in a while!

Should I invest in Stocks or Bonds?

A hard question to answer when you first invest is, should you do so in Stocks or Bonds? And then we may ask, which Stocks or Bonds?

One of the safer ways to invest is to do so via ETFs (Exchange Traded Funds). These are diversified collections of Stocks and Bonds. Diversification helps minimize (but not eliminate) risk in the stock market. While no one strategy works for everyone, investing in ETFs can lead to a portfolio with great returns because the risk is spread out: if one sector takes a hit and decreases in value, oftentimes another sector is gaining. Therefore, our list is composed of ETFs that maximize your returns.

What are the best ETFs for 2017?

If we know we’re going to invest in an IRA, and we know we want to minimize risk, then we want to invest in ETFs. Many firms offer their versions. We are partial to The Vanguard Group’s offerings because they have a proven track record and a consumer-friendly fee structure

5. VTI — Total Stock Market

Established in 2001, this ETF tracks the performance of the total U.S. Stock Market which include small-, mid-, and large-cap firms. Basically, a fund made of nearly 3,600 U.S. companies. The market capitalization (the worth) of the ETF is over $54 billion. It has yielded a return, since inception, of 6.32%. The Expense Ratio (the cost of owning this fund) is an extremely-affordable 0.05%. That is, you’re charged $5 per year for investing $10,000, for example. The risk potential is at 4 out of 5 which means higher risk, but higher reward.

4. VIG — Dividend Appreciation

This fund was established in 2006 and focuses on companies that have increased their dividends, year after year. You are, then, investing in companies that pay back their shareholders on a regular basis. The 186 companies selected for this fund make up $27 billion in assets. This fund’s yield, since inception, is 7.34% and the Expense Ratio is 0.09% (or $9 on an investment of $10,000). The risk potential is a 4.

3. VYM — High Dividend Yield

Another dividend-focused fund, this ETF has total net assets of $24 billion. The 420 companies picked all have higher-than-average dividend yields, which put more wealth in your pocket. Again, the risk potential is 4 out of 5, and the Expense Ratio is 0.09%. If you had invested in this fund since inception (November 2006), you’d enjoy a return of 7.42%.

2. EDV — Extended Duration Treasury

The previous three funds focused on company stock. This fund focuses on bonds. Bonds often offer a steady stream of income and can be comparatively “safer.” To maximize our return, however, we’ve chosen this fund (which is a 5 out of 5 on the risk potential scale). Since December 2007, this fund has enjoyed a 7.71% return. The fund is composed of 77 bonds and are worth $1.3 billion. Its Expense Ratio is 0.07%, the second-lowest in our list.

1. VNQ — Real Estate Investment Trust

This is our ETF choice geared toward those that want to invest in real estate without the hassle of down payments, mortgages, and actually managing the properties. This fund invests in companies that purchase office buildings, hotels, and other property. The risk potential is on par with three of our other ETFs: 4 out of 5. The Expense Ratio is the highest on our list at 0.12% (but still 90% lower than similar funds in this sector). This fund tops our list, however because it has the highest return rate: since inception we’ve earned 9.21%.

This list breaks down the ETFs with great returns, which you could use to bolster your IRA. It’s up to you to decide what ratio of Stocks to Bonds you’re comfortable with. A 75% Stocks (VTI, VIG, or VYM) to 25% Bonds (EDV) ratio could be a strategy you employ. Or perhaps you could go for 50% REITs (VNQ) to 50% Bonds (EDV). There are many possibilities, depending on your risk tolerance.

How do I invest in the stock market?

There are many options when it comes to actually putting your money in the stock market via an IRA. You could go to your local bank or credit union. Chances are, they have investment professionals there to help. Be warned, however, they are often more expensive than other options. It can be convenient to speak to a person one-on-one, especially if you’re a beginner to investing, but remember that their services are not free. They may not take payment directly from you, but they’ll be taking their payment from your earnings, dividends, and/or transactions.

Another option is a dedicated brokerage firm like Vanguard or BlackRock. Vanguard, for example, pioneered the Index Mutual Fund in the late ’70s and now manages trillions of dollars in assets from small investors to large ones. They are a phone call away, and many have branch offices in your city. By cutting out the middle-man, you can save on fees; you’d be investing in their funds directly.

Yet another option is to invest via online brokerage firms like TDAmeritrade and E*Trade. These firms often have lower fees because they are quite self-directed: it’s up to you to set up the account properly and use it. They do offer phone support, of course, and they probably have office locations in your area if you need the personal touch.

Lastly, a new generation of investment tools have cropped up, just in time to cater to Millennial Investors. These include Wealthfront and Betterment. These offer even more of a hands-off approach that attempt to diversify your portfolio and minimize risk.

The Takeaway

Whatever option you choose, always research fees. Remember: “Maximum Return from Minimal Fees.”

Bonus Video

DISCLAIMER

The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities.  This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any security in particular.


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