Daniel Sotiroff: ETFs are generally tax-efficient—that’s one of their biggest selling points. But their ability to defer taxes on capital gains doesn’t really cross over to assets that throw off a lot of dividends or interest that are taxed as regular income, like bonds. Those are best parked in a tax-deferred account, like an IRA, which defers or eliminates taxes owed on regular cash payments. With that in mind, let’s take a look at three bond ETFs that many investors could use as a core holding.
I’ll kick things off with a new kid on the bond ETF block. Vanguard Core Bond ETF, which trades under the ticker VCRB, was just launched in December. In typical Vanguard fashion, this ETF’s main advantage is its rock-bottom fee. Vanguard charges just 0.1% per year, making VCRB one of the cheapest actively managed core bond ETFs available. Charging less lowers the hurdle for Vanguard’s fixed-income managers. They don’t have to take unnecessary risks to overcome a steeper fee.
This is an actively managed ETF, so it will look and perform a little different from the broader bond market. Vanguard’s portfolio managers try to take advantage of opportunities when they’re appropriate and fit within the strategy’s constraints. Most of the time they’ll stick to investment-grade bonds with lower credit ratings and slightly higher yields. Every so often, they may go after bonds outside of the investment-grade universe to improve performance, but their allocation to these riskier bonds is limited to just 5%. That said, expect this fund to behave a lot like the Bloomberg US Aggregate Bond Index with some small advantages in the form of a mildly higher yield and total return over the long term.
Keeping with the bond ETF theme, Gold-rated Fidelity Total Bond ETF, ticker FBND, is another great core bond ETF to consider for your IRA. It’s a potentially riskier strategy than VCRB, but it comes with a higher expected return. Fidelity’s managers can invest a larger fraction of the portfolio in high-yield bonds when the risk/reward trade-off looks favorable.
You’ll pay a slightly steeper fee for this ETF. Fidelity charges 0.36% percent per year. And so far, it’s been worth the additional cost. FBND beat the Bloomberg US Aggregate Bond Index by more than 0.7 percentage points per year after fees from its October 2014 launch through the end of 2023.
Gold-rated iShares Core Total USD Bond Market ETF, ticker IUSB, is the third ETF that’s a good match for your IRA. Unlike VCRB and FBND, IUSB tracks an index—the Bloomberg U.S. Universal Index. It’s also the cheapest of the three ETFs for today, with an expense ratio of just 0.06%.
IUSB is a great index-tracking alternative to typical core bond ETFs, like Vanguard Total Bond Market ETF. It’s something to consider if you’re willing to take a little more risk in exchange for a little more reward. The index it tracks casts a wider net than Vanguard Total Bond Market, so it includes bonds with below-investment-grade credit ratings and others issued in emerging markets. But it isn’t swinging for the fences. Treasuries, mortgage-backed bonds, and investment-grade corporate bonds still make up the core of its portfolio.
Including ETFs in your Roth IRA can be a simple, inexpensive, and effective way to invest for your retirement. The potentially attractive returns offered by carefully selected ETFs are magnified by the tax-free growth afforded by a Roth IRA.
Experts agree that for most personal investors, a portfolio comprising 5 to 10 ETFs is perfect in terms of diversification. But the number of ETFs is not what you should be looking at.
The top ETFs for equities, bonds, fixed income, commodities, and currencies for April 2024 based on this metric include CRPT, FCVT, EMHY, DBA, and UUP.
A broad-based U.S. bond or fixed-income fund is generally less risky than an equity fund. However, bond funds don't provide the same growth potential, which means generally lower returns. They can be useful tools both for risk-averse investors and as part of a portfolio diversification strategy.
Filling your IRA with individual stocks and bonds is one option. Another is to compose your portfolio of mutual funds or exchange-traded funds (ETFs) for better diversification and, over the long term, better results.
History shows this can be a solid long-term strategy that is particularly suited for retirement accounts, such as a Roth IRA. Vanguard's S&P 500 ETF — ticker symbol VOO — attempts to closely track the S&P 500's returns and has generated a nearly 70% gain over the last five years, as of October 2023.
For instance, some ETFs may come with fees, others might stray from the value of the underlying asset, ETFs are not always optimized for taxes, and of course — like any investment — ETFs also come with risk.
VTI is a total U.S. market fund and holds more than 3,500 stocks. VTI is better diversified and benefits from small and mid-cap stocks that grow into large caps. VOO is less diversified, tracking the performance of the S&P 500 Index. VOO excludes small and mid-cap stocks.
In the past year, SPY returned a total of 22.57%, which is slightly lower than VOO's 22.70% return. Over the past 10 years, SPY has had annualized average returns of 12.31% , compared to 12.36% for VOO. These numbers are adjusted for stock splits and include dividends.
It's relatively simple: You add up all of your investments, and withdraw 4% of that total during your first year of retirement. In subsequent years, you adjust the dollar amount you withdraw to account for inflation.
Generally speaking, fewer than 10 ETFs are likely enough to diversify your portfolio, but this will vary depending on your financial goals, ranging from retirement savings to income generation.
Analysts project 11.5% earnings growth and 5.5% revenue growth for S&P 500 companies in 2024. Fortunately, analysts see positive earnings and revenue growth for all eleven market sectors this year.
Address: Suite 927 930 Kilback Radial, Candidaville, TN 87795
Phone: +8561498978366
Job: Legacy Manufacturing Specialist
Hobby: Singing, Mountain biking, Water sports, Water sports, Taxidermy, Polo, Pet
Introduction: My name is Ouida Strosin DO, I am a precious, combative, spotless, modern, spotless, beautiful, precious person who loves writing and wants to share my knowledge and understanding with you.
We notice you're using an ad blocker
Without advertising income, we can't keep making this site awesome for you.