Perhaps you're just getting started on your retirement savings, or only a few years away. In either case, saving and investing through an IRA is a great way to grow your wealth.
For those who want to invest in their IRAs but are just getting started, index funds are a great place to start. They can give your portfolio instant diversification, or even target a few compelling trends, all while paying low fees that don't eat into your returns.
To help you start making investments in your IRA, we asked three Motley Fool contributors to each highlight an index fund they think is worth considering. Here's why they picked iShares Dow Jones Select Dividend ETF (DVY 1.39%), Vanguard High Dividend Yield ETF (VYM 0.73%), and iShares MSCI Russia Capped Index Fund ETF (ERUS).
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A more selective dividend fund
Keith Noonan (iShares Select Dividend ETF): Roth IRAs better position investors to benefit from the power of compounding dividends. While payouts received through a standard brokerage account will typically be taxed at the long-term capital gains rates of 15% or 20% depending on your income and filing status, a Roth IRA sees you paying income taxes up front on the money that you're contributing but allows your investments to grow and compound without being taxed when you withdraw funds.
The combination of a tax-privileged account and dependable dividend payments tends to create substantially higher returns over long periods of time than you would see with the same investment held in a standard account. iShares Dow Jones Select Dividend ETF tracks the Dow Jones U.S. Select Dividend Index and stands out as a worthwhile fund for taking advantage of this dynamic.
While the iShares Select Dividend ETF bundles fewer securities than Vanguard High Dividend Yield ETF (98 stocks for iShare's fund compared to 405 for Vanguard's), it's still well diversified and has some selection criteria that add to its appeal. Stocks included within the fund must currently have at least a five-year history of consecutive payouts, non-negative earnings over the trailing-12-month period, and a five-year dividend coverage ratio greater than 167%. The companies also have to have increased their payout over the trailing five-year period.
The iShares Select Dividend ETF has an expense ratio of 0.39%, which is substantially higher than the Vanguard High Dividend Yield ETF, but the composition of the funds is different enough to make both worthy of holding in your IRA.
Dividends and diversity in one neat package
Tyler Crowe: (Vanguard High Dividend Yield ETF): High-yield dividend stocks typically get a reputation as stocks for retired people looking to supplement their income. That doesn't mean, however, that investors far from retirement should avoid these kinds of investments. Reinvested dividends, over very long time horizons, can be an incredibly powerful wealth building tool. When you sprinkle in the fact that those dividend gains over years or decades are tax-free, you get a great recipe for an investment in an IRA.
The fastest way to destroy value in a dividend investing strategy is to invest in stocks that can't grow their dividends for decades into the future. Or, even worse, invest in a company that cuts its payout for one reason or another. Being able to invest that far into the future is incredibly difficult because the competitive advantages one company might have today can erode over time.
That's what makes investing in Vanguard's High Dividend Yield ETF a great option for those with very long time horizons. In this case, you get the advantage of a high-yield investment -- the current SEC yield of this ETF is 3.17% -- with the added benefit of investing in hundreds of companies all at once such that dividend cuts from a couple companies aren't going to blow up your investment thesis. On top of that, this high-yield ETF's expense ratio is a very modest 0.08%, so you don't have to be concerned about expenses and fees eating into your returns over time.
The Vanguard High Dividend Yield ETF is chock-full of large, mature companies that tend to grow slower. So don't be surprised if this ETF underperforms during raging bull markets. If you are looking to invest for multiple decades through multiple bull and bear markets, though, then it's worth considering this ETF for your IRA.
Be greedy when others are fearful
Rich Smith (iShares MSCI Russia ETF): What's the best index fund to put in your IRA? Call me crazy (or just call me greedy), but I'm inclined to think it's the index fund that's cheapest -- and therefore has the most room to rise.
For my money, iShares MSCI Russia ETF fits that bill. Representing the Russian market, and in particular the "large and mid cap segments of the Russian market" that represent "85% of the free float-adjusted market capitalization in Russia," iShares MSCI Russia gives you exposure to arguably the cheapest stock market, representing the greatest value for your investing dollars, on the planet. According to Germany's StarCapital, the Russian stock market, with its cyclically adjusted Shiller P/E ratio of 6.1 and its P/E ratio of 7.5, is currently the No. 1 best bargain in the world. (iShares MSCI Russia, meanwhile, is even a bit cheaper than this, selling for a P/E of only 7.4.)
With $467.4 million in assets, iShares MSCI Russia captures a sizable slice of the Russian market, including such brand names as oil companies Lukoil and Gazprom and national bank Sberbank. It does so at an affordable price. This ETF sells for only a 0.14% premium to net asset value, and charges only a 0.6% management fee -- a fee quickly paid back by iShares MSCI Russia's generous 3.1% dividend yield.
Long story short, Russia isn't a popular place to invest right now -- but it is cheap. I expect both those facts to change over time, and putting iShares MSCI Russia ETF in your IRA is a good way to profit from that change.