Best Funds for IRAs
Individual Retirement Accounts are great vehicles to build a nest egg for life after work. But by themselves, they don't generate any income or
capital appreciation. An IRA needs a selection of mutual funds and ETFs that have the growth and income potential that retirement savers need. The
following funds are some of the best performing mutual funds for IRA.
S&P 500 Index Fund (IVV)
An S&P 500 index fund (symbol IVV) is an excellent choice to put in a retirement account. Over the
long term, this index has outperformed many other investments. iShares's IVV has an expense ratio of
just 0.07%, very low by industry standards. The portfolio has over $77 billion in assets, making it one of the largest ETFs in the world. It is passively managed, which means the fund does not frequently buy and sell stocks. Instead, it tracks the S&P 500, and only changes its holdings if the index changes. This passive management helps to keep the fund's expenses low.
Morningstar has given IVV five stars, the analyst's highest grade. Morningstar views its return
potential to be above average, while the risk of the portfolio is average. The fund pays dividends
every 3 months. The current yield is around 2%. Due to its popularity, approximately 4 million shares
are traded daily. This produces a very small bid-ask spread, further decreasing the cost of ownership.
On top of that, the fund can be purchased commission-free at
Firstrade and
Charles Schwab.
Dreyfus Small Cap Stock Index Fund (DISSX)
Investors who are at least a few decades away from retirement might want to consider a fund with somewhat higher risk than an S&P 500 index fund that
also has higher return potential. The Dreyfus Small Cap Stock Index Fund (symbol DISSX) has beat the S&P 500 index by 3% annualized on a 15-year basis.
The portfolio holds companies that have lower market capitalizations compared to the stocks in the S&P. The average market cap of the stocks in DISSX is slightly less than $1.5 billion, whereas the same figure for the S&P 500 is around $49.95 billion. Small cap stocks do have higher risk, but they historically have outperformed larger cap stocks. Investors who are further away from retirement and can handle increased volatility might benefit from the higher return potential of small cap stocks.
Lipper has awarded DISSX five out of five for both overall performance and the fund's expense ratio, which is just 50 basis points. The portfolio invests mostly in U.S. stocks with an overweight in basic materials and an underweight in real estate.
Vanguard's REIT Index Fund (VNQ)
Retirement savers who are interested in real estate should check out Vanguard's REIT Index Fund (symbol VNQ) from Vanguard. Real estate investment
trusts are required by U.S. law to distribute at least 90% of their income to shareholders annually. Consequently, REIT's and REIT funds are ideal
purchases for dividend investors. Despite the debacle in 2008, real estate as an asset class has performed well over the long term.
Vanguard's REIT Index Fund is passively managed and tracks the MSCI US REIT Index. VNQ's expense ratio is just 0.12%. The average volume of the
exchange-traded fund is very high, producing a very low bid-ask spread. Obviously, the fund costs very little to own. Its 10-year annualized
performance is 6.13%, which is almost 100 basis points higher than the category average.
VNQ has received a grade of 5 from Lipper for its overall performance. The fund pays distributions once per quarter. Its current dividend yield is over
3%. With a low expense ratio and a high dividend yield, shareholders of this fund can maximize their earnings over the long term. Even better, the ETF
can be bought and sold at Vanguard without paying any commissions.
DoubleLine's Low Duration Bond Fund (DLSNX)
During retirement, it may be a good idea to have a monthly stream of income. DoubleLine's Low Duration Bond Fund (symbol DLSNX) pays cash dividends at
the end of each month. This money can be used to pay living expenses, or simply rolled back into the fund.
DoubleLine's fund has a rating of 5 from Lipper. It buys and sells investment-grade bonds, including both government and corporate debt. Over 40% of
the fund's holding are AAA bonds. The average bond has a maturity of just over 2 years. DLSNX is clearly designed to be a safe fund. Despite this
emphasis on safety, the fund has a current yield of over 2%.
The fund's expense ratio is 0.68%, which is pretty good for an actively managed fund. The portfolio has more than $3 billion in assets. DLSNX is no
load and carries a $2,000 investment minimum for a regular a brokerage account; although for an IRA, the minimum is only $500.
Best Brokers For IRA
Best IRA Funds Recap
Choosing the right funds for an IRA is part science and part art. Knowing your financial needs and identifying how much risk you can bear in a
retirement account are great places to start. The above four top performing mutual funds for IRA are good examples of investments that can benefit
retirement savers in various situations.
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