If you ask a thousand investment professionals what the best funds for a Roth IRA are, my guess is you’ll get close to a thousand different answers. Everyone looks at the task at hand slightly differently. I believe the tax-free growth of the Roth IRA means you want to carefully balance risk and reward to ensure you have more than enough funds to withdraw in retirement.
The important thing to remember about the Roth IRA is you don’t want to get too aggressive with your investments. That’s because any capital losses you incur generally cannot be deducted against profits. The only way to deduct losses from your Roth IRA is to close your Roth IRA accounts.
Perhaps the best way to reduce risk is through diversification, which is one of the things that makes exchange-traded funds and mutual funds so popular. By holding a basket of investments, these funds reduce company-specific risk.
Therefore, I’ve chosen a mix of one mild, two medium, and two hot investments as the best funds for a Roth IRA.
|MNA||IQ Merger Arbitrage ETF||$31.68|
|IVV||iShares Core S&P 500||$392.36|
|FMCSX||Fidelity Mid-Cap Stock Fund||$38.17|
|DFAT||Dimensional U.S. Targeted Value ETF||$45.78|
|BPTRX||Baron Partners Fund||$113.71|
IQ Merger Arbitrage ETF (MNA)
First up on the list of best funds for a Roth IRA is the IQ Merger Arbitrage ETF (NYSEARCA:MNA), a passive ETF. According to the fund’s prospectus, it tracks the performance of the IQ Merger Arbitrage Index, which “seeks to employ a systematic investment process designed to identify opportunities in companies whose equity securities trade in developed markets, including the U.S., and which are involved in announced mergers, acquisitions and other buyout-related transactions.”
MNA’s top three holdings are STORE Capital (NYSE:STOR), Activision Blizzard (NASDAQ:ATVI) and Albertsons (NYSE:ACI).
Video game publisher Activision Blizzard has probably generated the most buzz recently due to its potential takeover by Microsoft (NASDAQ:MSFT). The ETF owns 452,837 shares of ATVI worth around $34.9 million. Like Warren Buffett, MNA stands to make millions should the deal get approved by the Federal Trade Commission and Microsoft pays $95 a share for ATVI stock.
Grocery store operator Albertsons has also been making headlines as it looks to finalize a $24.6 billion merger with rival Kroger (NYSE:KR).
Since its inception in 2009, MNA has delivered an annualized total return of 2.3%, and it has an expense ratio of 0.76%, which is high. However, the ETF deserves consideration for your Roth IRA as an excellent defensive position.
For example, over the past year, MNA is down just 1.9%, considerably better than the SPDR S&P 500 ETF Trust’s (NYSEARCA:SPY) decline of 16.2%. In 2018, the last time SPY was in negative territory in a calendar year, down 4.45%, MNA’s total return was 2.13%. In other words, MNA gives investors bond-like security but with equities.
Therefore, MNA is an attractive “mild” investment among the best funds for a Roth IRA.
iShares Core S&P 500 (IVV)
Buffett believes that the typical retail investor ought to buy a low-cost fund that tracks the S&P 500 and call it a day. There’s no need to get into individual stocks or esoteric thematic funds.
The iShares Core S&P 500 ETF (NYSEARCA:IVV) is a market cap-weighted fund that tracks the performance of the S&P 500. As a result, its top 10 holdings account for roughly 24% of the portfolio. However, as with the underlying index, tech stocks’ dominance has waned over the past few years. In September 2020, Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOGL, GOOG) and Meta Platforms (NASDAQ:META) accounted for 24% of the index. Today, that’s down to about 17%.
If you’re into equal-weighted ETFs, you could always invest in the Invesco S&P 500 Equal Weight ETF (NYSEARCA:RSP) instead. However, it charges a 0.2% management fee, 17 basis points more than IVV’s 0.03%, so you’ll pay $1.70 more in fees per $1,000 invested.
IVV is not just one of the best funds for a Roth IRA; it’s a foundational piece of any well-constructed portfolio. It’s also the first of my two medium-risk funds for your Roth IRA.
Fidelity Mid-Cap Stock Fund (FMCSX)
I’ve always liked mid-cap stocks because they strike a nice balance between smaller companies that are still growing and large caps that are established enterprises with excellent long-term track records. In other words, you get small-cap-like growth combined with solid, large-cap balance sheets. Some might call it the “sweet spot” of investing.
So, my second “medium” flavored investment among the best funds for a Roth IRA is the Fidelity Mid-Cap Stock Fund (MUTF:FMCSX).
The fund has been around since March 1994 and has grown to $7.9 billion in total net assets. As a blended fund, it invests in both growth and value stocks found in the Russell Midcap Index and S&P MidCap 400. Portfolio manager John Roth retired at the end of 2022 after managing the fund since 2011. Nicola Stafford, who co-managed the fund with Roth since 2016, is now running the fund.
The turnover of the actively managed fund is 17%. This means that they turn the entire portfolio approximately once every 5.75 years. Therefore, its expense ratio is reasonable at 0.85%.
FMCSX’s top 10 holdings account for 17% of its total net assets. The remainder is spread among its other 168 holdings, so it’s a relatively diversified portfolio. The top three sectors by weight are financial services (17.9%), industrials (17.3%) and consumer discretionary (10.4%). The U.S. accounts for 84.5% of the portfolio, while international stocks account for just under 11%.
Since its inception in 1994, FMCSX has had an annual total return of 11.2%.
Dimensional US Targeted Value ETF (DFAT)
Next up on the list of best funds for a Roth IRA is Dimensional US Targeted Value ETF (NYSEARCA:DFAT), the first of my two “hot” investments. This active ETF selects a broad group of small- and mid-cap stocks. Its benchmark is the Russell 2000 Value Index.
The higher the market cap, the higher the weighting allocated to a particular stock. It will invest in companies whose market cap is smaller than the 500th largest U.S. company, or roughly $12.3 billion.
DFAT was launched in December 1998. On June 14, 2021, it was converted from a mutual fund into an ETF. It has $7.6 billion in total net assets and a net expense ratio of 0.29%, which is extremely low for an actively managed ETF.
The top 10 holdings account for just 6.3% of the ETF’s portfolio. In total, it holds over 1,600 stocks, providing investors with significant diversification. The top three sectors by weighting are financials (27.8%), industrials (19.2%) and consumer discretionary (14.4%).
Since its inception, DFAT has an annualized total return of 9.6%.
Baron Partners Fund (BPTRX)
I’m a big fan of all-cap funds like Baron Partners Fund (MUTF:BPTRX) because the best stocks often come in different sizes. And it pays to own the best, regardless of market capitalization.
BPTRX invests mainly in U.S. companies that have significant growth potential. Managing the fund is long-time portfolio manager Ron Baron, the founder of Baron Funds, and his son, Michael. Between them, they’ve got more than 70 years of experience.
In the fund’s Q3 2022 shareholder letter, they note: “We believe this market, while difficult, is beginning to reward high quality companies that are demonstrating good operational performance. The Fund’s ownership of many of these businesses allowed it to perform well in the current quarter. But investors are still shunning companies that are investing for growth and penalizing near-term performance. We believe this provides opportunities for timely investments and future strong returns for many stocks in the portfolio.”
The fund, which has $4.8 billion in net assets, currently holds 37 stocks with a median market cap of $15.9 billion. The top 10 holdings account for 83% of the portfolio, with Tesla (NASDAQ:TSLA) by far the most significant holding at a whopping 25.8%. So, if you don’t like Tesla, BPTRX isn’t for you.
While this mutual obviously carries more risk than some of the other names on this list of the best funds for a Roth IRA, it has proven to be a big winner over the long haul. Its annualized total return of 19.5% over the past 10 years easily beats the S&P 500’s 12.6%.
Baron Partners Fund is the hottest of investments for your Roth IRA, both in terms of potential risk and reward.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.