Barron’s published an article in September 2021 that discussed how to invest in a Roth IRA to maximize potential returns. While it didn’t specifically address the best funds to buy for a Roth IRA, it did provide suggestions on where investors should allocate their hard-earned savings.
It noted that billionaire tech investor and co-founder of PayPal (NASDAQ:PYPL), Peter Thiel, put $2,000 of his founder shares in his Roth IRA in the late 1990s. When Barron’s published the article, the shares were worth $5 billion. Thiel is currently 54. If he waits another 5.5 years, he’s saved himself a massive amount of taxes.
One of the article’s themes was that riskier investments belonged in Roth IRAs because you can withdraw the assets once you turn 59.5 and not pay a single cent of tax on the gains. However, if you lose money on your investments within a Roth IRA, you can’t deduct the capital losses against capital gains held outside your Roth IRA in taxable accounts.
I think it makes sense for most investors to be aggressive with their Roth IRA investments, but not too much so.
With that in mind, I’ve selected seven of the best funds for a Roth IRA. Three are mutual funds, and four are ETFs.
|BPTRX||Baron Partners Fund||$161.70|
|BOSOX||Boston Trust Walden Small Cap Fund||$16.73|
|FMCSX||Fidelity Mid-Cap Stock Fund||$38.91|
|IVV||iShares Core S&P 500||$593.30|
|DFAT||Dimensional US Targeted Value ETF||$45.49|
|VXUS||Vanguard Total International Stock ETF||$54.10|
|PRFZ||Invesco FTSE RAFI US 1500 Small-Mid ETF||$174.01|
Best Funds for a Roth IRA: 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. 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.
The fund’s strategy, according to Baron’s second quarter 2022 shareholder letter:
Baron Partners Fund seeks to invest in businesses that we believe can double in value within five or six years. The Fund invests for the long term in a focused portfolio of appropriately capitalized, well-managed growth businesses at attractive prices across market capitalizations.
The fund currently holds 31 stocks invested in $5.53 billion in total net assets. The median market cap is $14.57 billion. The top 10 holdings account for 84.5% of the portfolio, with Tesla (NASDAQ:TSLA) the most significant holding at a whopping 46.3%. If you don’t like Tesla, BPTRX isn’t for you.
Over the past 10 years, the fund has had an annualized total return of 24.52%. That compares to 13.52% for the entire U.S. market.
Boston Trust Walden Small Cap Fund (BOSOX)
The Boston Trust Walden Small Cap Fund (MUTF:BOSOX) has an excellent ticker for a Boston-based investment management firm. I’m a Blue Jay fan, but you’ve got to like it.
As for the fund, it got its start on Dec. 31, 1994. Its performance from inception through June 30 is 10.62%, 195 basis points higher than the Russell 2000. It has accumulated $986.3 million in total net assets over the 28 years.
The fund invests in small-cap issuers similar to the Russell 2000, ranging from $32 million to $33 billion. As of June 30, its top 10 holdings accounted for 21.6% of the portfolio. Familiar names within the top 10 are Flowers Foods (NYSE:FLO) and Chemed (NYSE:CHE). Regarding sector allocation, the top four by weight are healthcare, industrials, technology and consumer discretionary.
Three portfolio managers run the fund led by co-CEO Kenneth Scott, who’s been in the investment industry since 1991 and with Boston Walden since 1999. Boston Walden started in 1974 as the investment and trust division of the US Trust Company of Boston. It launched its first mutual fund in 1995. It became 100% employee-owned in 2004. It hasn’t looked back since then.
Best Funds for a 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.
The Fidelity Mid-Cap Stock Fund (MUTF:FMCSX) has been around since March 1994. It’s grown to $7.33 billion in total net assets. As a blend fund, portfolio managers John Roth and Nicola Stafford — Roth and Stafford have managed the fund since 2011 and 2016, respectively — invest in both growth and value stocks found in the Russell Midcap Index or S&P MidCap 400.
The turnover of the actively-managed fund is 17%. This means that they turn the entire portfolio approximately once every 5.75 years. Its expense ratio is reasonable at 0.85%.
FMCSX’s top 10 holdings account for 17.12% of its total net assets. The remainder is spread among its other 155 holdings, so it’s a relatively diversified portfolio. The top three sectors by weight are financials (19.32%), industrials (16.57%), and energy (10.88%). The U.S. accounts for 82% of the portfolio, with international stocks accounting for the rest.
Since its inception in 1994, it has had an annual total return of 11.44% through July 31.
iShares Core S&P 500 (IVV)
Warren Buffett believes that the typical retail investor ought to buy a low-cost S&P 500 fund and call it a day. There’s no need to get into individual stocks or esoteric thematic funds.
So, it makes sense to include the iShares Core S&P 500 (NYSEARCA:IVV) in a group of seven funds to hold in a Roth IRA. Over time, S&P 500 ETFs have proven to be real winners for retail and institutional investors. Bank of America (NYSE:BAC) owns $20.6 billion of IVV. It must be doing something right.
The low fees make IVV very attractive. It charges just $3 per $10,000 invested in the ETF. It costs you more to buy an espresso at your favorite coffee shop. As Buffett says, it’s a bargain.
Not much else needs to be said about IVV. It’s a core holding for most well-constructed portfolios.
Best Funds for a Roth IRA: Dimensional US Targeted Value ETF (DFAT)
Whenever I do gallery-type articles, whether three or seven-stock stories, I like to diversify my recommendations. In this case, I’m diversifying by ETF and mutual fund providers.
The Dimensional US Targeted Value ETF (NYSEARCA:DFAT) is an active ETF that selects a broad group of small and mid-cap stocks. 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. At the end of December 2021, that was $13.93 billion.
DFAT was launched in December 1998. On June 14, 2021, it was converted from a mutual fund into an ETF. It has $7.1 billion in total net assets. An actively managed ETF’s management fee of 0.27% is extremely low.
The top 10 holdings account for just 7% of the ETF’s portfolio. In total, it holds 1,617 stocks, providing investors with significant diversification. The top three sectors by weighting are financials (28.56%), industrials (19.71%), and consumer discretionary (13.39%).
Since its inception, its annualized total return has been 9.38% through June 30.
Vanguard Total International Stock ETF (VXUS)
You can’t put together a list of funds to buy without including Vanguard, which made passive investing successful.
Most of my selections have been US-focused, so I’m going with the Vanguard Total International Stock ETF (NASDAQ:VXUS), which tracks the performance of the FTSE Global All Cap ex US Index. The index comprises stocks in developed and emerging markets except for the U.S.
The ETF currently holds 7,843 stocks, 281 more than the index. The median market cap is $28.8 billion, with an average return on equity of 12.4%. The top 10 holdings account for 9% of the ETF’s $46.0 billion in total net assets.
Developed markets represent 26.4% of the portfolio, while developed markets account for 73.6%. Of the developed markets, Europe accounts for 38.8% of the total net assets. Japan is the top country at 15%.
Since its inception, VXUS has delivered an annual total return of 3.57% through July 31. The management expense ratio of 0.07% is very low for a global ETF. To avoid home-country bias, investors ought to consider some portion of stocks outside the U.S.
Best Funds for a Roth IRA: Invesco FTSE RAFI US 1500 Small-Mid ETF (PRFZ)
I don’t know about you, but I like several of Invesco’s ETFs. However, there’s something different about many of them. They don’t get the following that Vanguard or iShares do but they should.
The stocks in the index are selected based on book value, cash flow, sales, and dividends. The stocks included in the index are weighted based on their ranking in all four criteria. The index and ETF are reconstituted annually.
PRFZ currently has 1,472 holdings invested in $2.13 billion in total net assets. The typical holdings have a forward price-to-earnings ratio of 14.62, a return on equity of 7.63%, and a price-to-book of 1.91.
The sector diversification is good, with financials, industrials, technology, consumer discretionary, and healthcare all weighted at more than 10% of the portfolio. Small-cap stocks account for 86.81% of the total net assets, mid-caps (12.92%), and large caps (1.27%).
Since its inception in September 2006, PRFX has generated an annual total return of 9.12% through July 31.
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.