There’s something really magical about an individual retirement account (IRA) when it comes to building a retirement portfolio. The secret to the IRA comes down to taxes. It doesn’t matter which type you choose — a Traditional or Roth IRA — any investment placed inside the account will be able to grow without the taxman getting his grubby hands on it.
Dividends, capital gains, interest income, etc. can compound tax-deferred or in the case of a Roth IRA, tax-free, until you need to spend it.
This ability makes the IRA one of the best tools regular investors have to grow their nest eggs.
This tax-deferred/free compounding also makes the IRA better suited for certain investments. Those that offer high long-term growth opportunities or potential tax hiccups are best when placed inside the account. And with exchange-traded funds (ETFs) covering every asset class at this point, the pairing of IRAs and ETFs is a match made in heaven.
With that in mind, here are three of the best ETFs to take advantage of everything an IRA has to offer.
Best ETFs for Your IRA: iShares Exponential Technologies ETF (XT)
Expense Ratio: 0.47%, 0r $47 for every $10,000 invested
Technology and high growth just go hand and hand, which makes tech stocks great additions for an IRA. And the iShares Exponential Technologies ETF (NYSEARCA:XT) could be the best ETF to play them.
XT invests in the newest of the new — the cutting edge, highest high-te …well, you get the picture. That includes tech sub-themes like cloud computing, robotics, bioinformatics, nanotechnology and more, all under one easy to trade and own ticker. There’s no need to go out and buy the individual companies or cobble together a few sub-sector ETFs. You get nearly 200 of them with XT.
These various themes are just in their infancy and will take a long time to become mainstream. Why pay taxes on the gains along the way? XT in an IRA just makes sense.
Also making sense is the ETF’s returns. In its one year of operation — it launched at the very end of 2015 — XT has managed to return over 10%. If those sorts of gains can continue, XT could be a massive wealth generator inside an IRA. Meanwhile, expenses for the fund are a cheap 0.47%.
In the end, the high-tech world of XT is best suited for the tax-deferred/free status of an IRA.
Best ETFs for Your IRA: Vanguard REIT ETF (VNQ)
Expense Ratio: 0.12%
Real estate investment trusts (REITs) are fantastic investments. In exchange for some tax benefits at the corporate level, these owners of commercial real estate are required to distribute at least 90% of their taxable income to shareholders in the form of dividends.
As a result, REITs often have yields of 4% or more. The problem is — and why they are perfect for an IRA — that those dividends are treated as ordinary income for tax purposes. That means they are subject to a higher tax rate compared to the qualified dividend tax rate of 15%.
To skirt the taxes, the Vanguard REIT ETF (NYSEARCA:VNQ) needs to be placed in an IRA.
VNQ is the largest REIT fund at $61 billion in assets. It spreads those assets among 156 different REITs, including mall operator Simon Property Group Inc (NYSE:SPG) and healthcare-focused Ventas, Inc. (NYSE:VTR). Mortgage REITs and Hybrid REITs are not included in the ETF. As a Vanguard ETF, VNQ’s expenses are insanely low at just 0.12%.
Another reason why VNQ should belong in your IRA is its total returns. Those dividends plus capital appreciation have made REITs one of the best long-term asset classes to own. VNQ has managed to return over 9% annually since its inception in 2004.
Do your portfolio a favor and hold VNQ in a tax-deferred/free account.
Best ETFs for Your IRA: SPDR DoubleLine Total Return Tactical ETF (TOTL)
Expense Ratio: 0.55%
Because the taxes on bond interest is higher than dividends, most fixed income investments should be held in an IRA. And when you add a dose of capital gains potential thanks to trading, then they really should be placed inside the tax-deferred vehicle.
The combination of the two reasons is why the SPDR DoubleLine Total Return Tactical ETF (NYSEARCA:TOTL) makes an ideal IRA investment.
TOTL is run by bond-guru Jeff Gundlach at DoubleLine Capital. As an active fund, Gundlach can trade in and out of bonds as opportunities arise. Today, Gundlach has placed the majority of the ETF in mortgage-backed securities. Treasury, emerging market bonds, commercial mortgage securities and investment-grade corporate bonds round out the top five holdings.
So far, Gundlach has been pretty good on his selection and calls. TOTL has managed to outperform the broader Bloomberg Barclays U.S. Aggregate Bond Index since its inception. And part of the return has come from higher interest payments and capital gains. Two things that could bite come tax time.
In the end, TOTL and its active management belong in your IRA.
As of this writing, Aaron Levitt was long XT.