Best ETFs for a Roth IRA

It’s never too early to start investing for your retirement. Getting started now and contributing to your retirement account for several years can help you save on taxes and increase the likelihood of a financially secure future. Roth IRAs shield your funds from capital gains taxes, and you don’t have to pay taxes on dividends either.

These perks become more advantageous if your retirement account grows substantially over time. You can pick stocks, but investors looking for a simpler approach may want to focus on exchange-traded funds (ETFs). This guide will cover some of the top ETF choices and what to consider before making an investment. 

Quick Look at the Best ETFs for a Roth IRA:

6 Best ETFs for Roth IRA

Investors get exposure to many companies through ETFs. Some of these funds follow indices, while others gravitate toward a sector or theme. Check out some of the top ETFs for your Roth IRA.

1. Invesco QQQ Trust Series 1 (NASDAQ: QQQ) 

QQQ mirrors the Nasdaq 100 Index and has a strong focus on technology (58.94%) and consumer discretionary (17.9%) stocks. The fund does not have a minimum initial investment and has a 0.20% expense ratio. QQQ has generated an annualized return of 18.58% across 10 years. The fund’s top three holdings are Microsoft (8.67%), Apple (7.96%), and NVIDIA (6.32%).

2. SPDR S&P 500 ETF Trust (NYSEARCA: SPY)

SPY mirrors the S&P 500 and has a low 0.09% expense ratio. The fund has generated a 12.68% annualized return over the past 10 years. The fund’s top holdings are Microsoft (7%) Apple (6.12%), and NVDA (5.01%). SPY’s top three sectors are information technology (30.15%), financial services (12.67), and healthcare (12.32%). While QQQ focuses more on tech, SPY gives investors broader exposure to more companies. However, the top 10 stocks for both of these funds are similar. 

3. VanEck Semiconductor ETF (NASDAQ: SMH)

The VanEck Semiconductor ETF gives investors exposure to a critical industry that has experienced high revenue and net income growth. Smartphones, cars, appliances and other essentials all need semiconductors to operate smoothly, and artificial intelligence only makes them more valuable. The fund’s 0.35% expense ratio is higher than the previous two funds, but it has better historical returns. SMH has generated a 26.84% annualized return over the past 10 years. The fund’s top three holdings are NVIDIA (20.65%), Taiwan Semiconductor Manufacturing (12.74%) and Broadcom (7.75%).

4. Vanguard Real Estate Index Fund ETF (NYSEARCA: VNQ)

The Vanguard Real Estate Index Fund doesn’t gain as much as high-growth funds, but it can be more resistant to recessions. The fund invests in real estate investment trusts (REITs) and only has a 0.26% expense ratio. The fund has generated a 4.99% annualized return over the past 10 years. This fund pays more generous dividends, and in a Roth IRA, you won’t have to worry about getting taxed on those payouts. The fund’s top three holdings are Vanguard Real Estate II Index Fund Institutional Plus Shares (13.03%), Prologis (7.59%) and American Tower Corp. (5.81%).

5. JPMorgan Equity Premium Income ETF (NYSEARCA: JEPI)

The JPMorgan Equity Premium Income ETF doesn’t generate as much return as the other funds, but its high dividend yield makes it a fund to consider. JEPI has provided investors with a 12-month rolling dividend yield of 7.98%. The fund’s top three holdings are Trane Technologies (1.73%), The Progressive Corporation (1.69%), and Amazon (1.68%). The company generates high cash distributions by selling covered calls. This strategy can result in higher taxes since they aren’t qualified dividends. However, you won’t have to worry about taxes if you accumulate JEPI shares in a Roth IRA.

6. Vanguard Growth Index Fund ETF (NYSEARCA: VUG)

The Vanguard Growth Index Fund ETF has generated a 14.56% annualized return over the past 10 years. The fund has a generous 0.04% expense ratio, which means you get to enjoy good returns without much cost. VUG aims to mirror the performance of the CRSP U.S. Large Cap Growth Index. VUG’s top three holdings are Apple (10.43%), Microsoft (12.97%), and NVIDIA (8.88%). 

Importance

ETFs give investors diversified portfolios that focus on a sector, theme or market index. These assets can generate long-term returns and tend to have lower expense ratios. Many ETFs are tax-efficient, and if you receive high distributions, a Roth IRA can protect you from paying taxes on them.

How to Choose

Investors should analyze ETFs before adding them to their portfolios. These are some of the things to look for when choosing ETFs for your Roth IRA.

• Historical performance: Investors should look at an ETF’s annualized performance over long time horizons. For example, 1-year, 3-year, 5-year and 10-year annualized returns can help you gauge if the ETF is reliable and consistent or if it is volatile, although past performance is not a guarantee of future success. 
• Your risk tolerance: Some investors do not want to incur as much risk. Picking safer ETFs can minimize your returns but also minimizes your risk.
• Asset concentration: ETFs give you diversified portfolios, but you should still know what is in the diversified portfolio. Many ETFs list their top 10 holdings and reveal the concentration they hold in each position.

Compare Brokers

Investors can choose from many ETFs. Researching your choices can lead to better investments that align with your financial goals. It’s also a good idea to look around for brokers and see which one can offer you the best experience. These are some of the top brokers to consider. 

Diversify Your Retirement Account

ETFs give investors exposure to dozens, if not hundreds, of stocks. These assets make it easy for investors to diversify their portfolios and gain exposure to several sectors and opportunities. Investing in ETFs with your Roth IRA account can protect you from taxes on your capital gains and cash distributions.

Frequently Asked Questions