Now that tax season is in the rearview mirror, investors can get back to contributing to their retirement portfolios, including individual retirement accounts (IRAs). Good news for investors: IRA contribution limits are moving up.
Investors under 50 years old can now contribute up to $6,000 per year to traditional and Roth IRAs while individuals 50 years old and older can add another $1,000 to that figure, according to the IRS.
For investors that enjoy building their retirement portfolios themselves, ETFs are among the ideal vehicles for use in tax-advantaged accounts, such as IRAs. As has been widely noted, many of the best ETFs are also inexpensive, providing a significant benefit to long-term investors.
Many of the best retirement ETFs for consideration in IRAs should be cheap funds because high fees can erode long-term total returns. Additionally, ETFs help investors efficiently access an array of asset classes, helping bolster portfolio diversification.
Here are some of the best retirement ETFs to consider if you’re looking to make additions to your IRAs.
SPDR S&P Dividend ETF (SDY)
Expense ratio: 0.35% per year, or $35 on a $10,000 investment.
Some of the best retirement ETFs are dividend funds. The SPDR S&P Dividend ETF (NYSEARCA:SDY), one of the largest U.S. dividend ETFs, is a solid place to start, particularly for dividend investors looking for steadily rising payouts. The $19.77 billion SDY tracks the S&P High Yield Dividend Aristocrats Index, which requires member firms to have minimum dividend increase streaks of 20 years.
There are plenty of dividend-paying stocks in the U.S. and many of the best ETFs hold those stocks, but requiring two decades of higher payouts helps investors identify the cream of the dividend crop. As such, SDY is home to just 111 stocks. For long-term investors, dividends are an integral part of their outcomes.
“Over the past 30 years, dividends from S&P 500 stocks have, on average, contributed exactly half of the index’s total return on an annual basis,” according to State Street research. “While price returns of equities can fluctuate year over year, dividends tend to be more stable, consistently offering a positive contribution to total return each year.”
SDY, which yields 2.39%, allocates nearly 34% of its combined weight to the industrial and financial services sectors.
iShares Edge MSCI USA Quality Factor ETF (QUAL)
Expense ratio: 0.15%
The quality factor makes a lot of sense for investors of all skill levels, but with this current bull market aging by the day, novice investors, in particular, may want to consider quality stocks. The iShares Edge MSCI USA Quality Factor ETF (CBOE:QUAL) is one of the best ETFs for accessing a broad basket of domestic stocks with the quality designation.
The $11.30 billion QUAL, which holds 125 stocks, defines quality with the following metrics: return on equity, earnings variability and debt-to-equity. Long-term performance data indicate that the quality factor not only provides substantial upside capture in bull markets, but reduces some of the downside often experienced in bear markets.
“Quality strategies seek enhanced returns versus the market through exposure to profitable companies with less debt and more stable earnings,” according to BlackRock. “Since the Quality factor has historically delivered more upside capture with less downside resilience, it may be more appropriate for risk-aware, return seeking investors.”
Xtrackers USD High Yield Corporate Bond ETF (HYLB)
Expense ratio: 0.15%
Bonds are an important part of the retirement asset class mix and fixed income funds are among the best ETFs for consideration in IRAs. Conventional wisdom dictates that older investors may want to shy away from riskier fixed income investments, but younger investors with the luxury of more time can consider high-yield corporate debt. For cost-conscious investors, the Xtrackers USD High Yield Corporate Bond ETF (NYSEARCA:HYLB) is one of the best ETFs in the junk bond space to consider.
HYLB, which tracks the Solactive USD High Yield Corporates Total Market Index, debuted in late 2016 with an expense ratio 0.15%. Proving the usefulness of low fees, HYLB is now home to more than $2.8 billion in assets under management and has forced some rivals to cut fees on junk bond ETFs or create comparably-priced funds.
HYLB holds over 1,000 bonds and has a yield to worst of 6%. Over 90% of the fund’s holdings are rated BB or B, but it does have a 6% weight to speculative CCC-rated debt.
Vanguard FTSE Developed Markets ETF (VEA)
Expense ratio: 0.05%
Some of the best ETFs for IRAs are international equity funds, something investors should remember because many are often over-allocated to domestic equities. Fortunately, some of the best ETFs for international exposure are also some of the cheapest. That includes the Vanguard FTSE Developed Markets ETF (NYSEARCA:VEA).
In fact, VEA’s already modest fee was recently pared to 0.05% from 0.07%. Home to $72.52 billion in assets under management, VEA is not just the largest international ETF trading in the U.S., it is the sixth-largest ETF of any variety. This is also one of the best ETFs for investors looking for a big basket of stocks as VEA is home nearly 4,000 holdings.
Japan and the U.K. combine for almost 37% of VEA’s geographic exposure while Canada and France combine for 17.10%. Over the past three years, VEA has modestly outpaced the MSCI EAFE Index with slightly less volatility.
iShares Core MSCI Emerging Markets ETF (IEMG)
Expense ratio: 0.14%
Keeping with the theme of international equity exposure, emerging markets funds are among the best ETFs for risk-tolerant retirement planners and younger investors with lengthy time horizons. The iShares Core MSCI Emerging Markets ETF (NYSEARCA:IEMG) confirms that some of the best ETFs in the emerging markets space are also inexpensive.
In terms of superficial superlatives, IEMG is the second-largest emerging markets ETF trading in the U.S. and one of the least expensive. IEMG targets the MSCI Emerging Markets Investable Market Index and has been one of the top ETFs in terms of new assets added over the past several years.
IEMG holds over 2,200 stocks and its three-year standard deviation of just under 13% is palatable for many investors. Making emerging markets solid ideas for long-term investors are the depressed valuations seen in many of developing economies coupled with still robust economic growth expectations.
More than 15 countries are represented in IEMG, but China is the dominant geographic exposure at 30.74%, a percentage that is likely to increase later this year when MSCI adds more Chinese A-shares to its international indexes.
Todd Shriber does not own any of the aforementioned securities.