Retirement savers received a big let down from the IRS recently. While the tax agency did raise the annual contribution limits on 401ks by $500, it left the amount of cash you can stuff into an IRA — currently $6,000 — the same. This is now the second straight year at those contribution caps. That means anyone contributing to an IRA needs to make the most out of each contribution.
Luckily, there are several exchange traded funds (ETFs) that can do just that.
The best ETFs for IRAs and Roth IRAs are those that feature plenty of long-term growth and opportunity. The tax-deferred or tax-free nature of IRAs allow for decades of compounding potential. The best ETFs track market segments and themes that deliver on those lines. Just contribute, click “buy” and walk away for 20 to 30 years. It’s here that investors can make the most out of the flat-lining contribution caps for IRAs and grow their capital over the long haul.
But with more than 1,750 different exchange traded funds now on the market, how do you know which could be the best ETFs to stuff in your IRA? Fortunately for you, InvestorPlace has done some of the leg work.
With that, here are five of the best ETFs for your IRA.
The Best ETFs for Your IRA: iShares Exponential Technologies ETF (XT)
Every where you look these days, technology is transforming our lives, industries, and the world. But that tech transformation doesn’t always originate in the actual technology sector. Just focusing on a tech fund may not be the best choice for long-term investors. This fact makes the iShares Exponential Technologies ETF (NYSEArca:XT) one of the best ETFs to play the tech transformation and it belongs in your IRA.
XT tracks an index of the firms operating in the latest in innovation. We’re talking cloud computing, 3D printing, Internet of Things (IoT), bioinformatics, etc. It’s all in there. The beauty is that the ETF doesn’t just focus on traditional tech stocks. In fact, only about a third of its portfolio is in tech companies. The rest spans everything from financials to industrial names. Top holdings include Seattle Genetics (NASDAQ:SGEN) and NVIDIA (NASDAQ:NVDA).
This broad mandate and focus on high-innovation is a wonderful long-term theme. Some of these ideas will take a while before becoming mainstream and are still in their infancy. So, the ETF is designed to be a long-term growth engine of a portfolio. Why pay taxes on the long-term gains along the way? XT in an IRA just makes sense.
And it’s done pretty well on that front already. Since its inception in 2015, XT has managed to produce an average yearly 11% return.
With low expenses of just 0.47%, or $47 per $10,000 invested, XT is one of the best ETFs to hold in an IRA.
Vanguard Small-Cap Value ETF (VBR)
A lot of ink has been spilled on “factors” and smart-beta indexing. But one of the truths backed up by plenty of data, is that “small” generally beats “large,” and “value” beats “growth.” When you combine the two, you have a recipe for long-term success. And that’s just what the Vanguard Small-Cap Value ETF (NYSEArca:VBR) does.
VBR tracks the performance of the CRSP US Small Cap Value Index. This benchmark owns the cheapest small-cap stocks in the U.S. The ETF currently owns nearly 860 different stocks. That’s just under half of the entire small-cap universe. This concentration allows for investors to tap into the full potential of the small-cap value out-performance phenomenon.
And outperform it has. Over the last decade, VBR has managed to produce a staggering 11.57% annual return. Meanwhile, the ETF also throws off some impressive yield- currently at 2.25%. These sorts of high, long-term returns just beg to be placed inside a tax-deferred/free vehicle. And given the recent shift back to value stocks, VBR’s long-term success is almost assured. Even better is as a Vanguard ETF, VBR is dirt cheap to own at just 0.07%.
All in all, small-cap value has been one of the best places to find growth and VBR could be one of the best ETFs tracking that theme.
Invesco WilderHill Clean Energy ETF (PBW)
Investing in renewable and alternative energy sources has been a wild ride since the recession. But the promise of solar stocks like First Solar (NASDAQ:FSLR) and wind producers is certainly great. And with adoption rates rising and costs per kilowatt dropping, renewable energy is becoming more of a sure thing. The best place to put your renewable energy investments to realize all that compounding potential is in your IRA.
One of the oldest and elder statesmen funds in the sector is the Invesco WilderHill Clean Energy ETF (NYSEArca:PBW).
The U.S.-focused ETF tracks a basket of stocks that are “engaged in the business of advancement of cleaner energy and conservation.” That’s actually a pretty mandate and includes the obvious solar panel producers like FSLR. However, PBW includes other stocks that operate in the clean energy realm such as construction firm MYR Group (NASDAQ: MYRG), who specializes in erecting wind turbines and transmission lines, as well as Itron (NASDAQ:ITRI), who makes smart-meters. This makes PBW a very broad play on the renewable energy theme and its overall growth.
As for realizing that growth, returns for PBW have been spotty. But that just underscores the long-term nature and risk of renewable energy. With adoption growing, long-term investors may finally realize the potential. With that PBW could be one of the best ETFs to buy in your IRA and forget about for a while.
iShares MSCI Frontier 100 ETF (FM)
For early investors in China, the last few decades have been amazing in terms of returns as the nation has grown from an agrarian society to modern manufacturing powerhouse. If you had the ability to hop in a time machine and travel back, you could also reap the same sort of returns.
The truth is, we kind of can do that via iShares MSCI Frontier 100 ETF (NYSEArca:FM).
FM focuses on so-called frontier markets. These are “emerging” emerging markets and are nations just in their beginnings of economic expansion and growth. We’re talking about countries like Kenya, Vietnam, and Romania. These nations feature plenty of risk, but also plenty of reward as they start to transform. The beauty of using FM and why its one of the best ETFs is that it allows Regular Joes access to these stocks. It’s pretty much impossible for you or I to buy stocks on the Kuwait Stock Exchange. But with FM, it’s one-ticker access.
And the ETF does belong in your IRA as this is not an overnight theme. It’s going to take some real time for many of these nations to move up the economic ladder. That means buying shares and ignoring them for a bit in order for the theme to take off.
Perhaps the only drag is the FM is expensive at 0.81%. However, considering what it owns, the cost is justified.
Schwab U.S. REIT ETF (SCHH)
If you had to guess what the best-performing asset class over the long term was, you probably would guess stocks. However, that’s not the case. Real estate investment trusts (REITs) have managed to crush stocks by a wide margin. In fact, REITs managed to produce average annual net return of 10.9% over the last 20 years. Only private equity did better. But thanks to their tax quirks on their high dividends, there is only one place to put your REIT exposure and that’s in your IRA.
The Schwab U.S. REIT ETF (NYSEArca:SCHH) could be a wonderful way to get your exposure. SCHH tracks the bread-and-butter Dow Jones U.S. Select REIT Index. With the ETFs 98 different holdings, investors get access to apartment owners, office buildings, shopping centers and even warehouses. Better still is that the index focuses on the top real estate owners in their respective categories. This provides plenty of stability, size and cash flows.
SCHH has had plenty of returns as well. Since its inception in 2011, the ETF has managed to produce a great 10.31% annual total return. This just underscores REITs ability to produce gains over the long haul. By placing them in your IRA, investors can get maximum compounding potential with the tax headaches.
And with low expenses of just 0.07%, SCHH could be the best ETF to do just that.
At the time of writing, Aaron Levitt held a long position in XT.