Taxation can drastically alter lifestyle in retirement by reducing investment gains, and Roth IRAs are a great tool for limiting that risk.
Contributions to Roth accounts may not share the contribution tax deductions of 401(k)s or traditional IRAs, but investors will enjoy zero taxation on withdrawals in retirement. 401(k) distributions are taxed as ordinary income, and investments held in brokerage incur capital gains taxes. This makes Roths a fantastic place to house the high growth portion of a retirement portfolio because taxation could wipe out more gains in other accounts. This is especially true for young investors with long time horizons or retirees who are maintaining a growth portion of their portfolio.
There are plenty of high-growth opportunities in the market, but a great way to responsibly balance risk with long-term gains is to purchase niche ETFs that are exposed to growth trends that are expected to characterize the next few decades. This approach offers diversified exposure without being pulled down by stable, but low-growth investments.
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Specific industries will grow into prominence
Many technology experts and futurists expect increasing connectivity to be among the dominant trends in upcoming decades, with tech playing a more ubiquitous and fundamental role in everyday life and business. Companies that enable communication, data analytics, cybersecurity, and automation will be financial beneficiaries of these trends. There are ETFs designed specifically to focus on the companies at the forefront of emerging technology in the above industries. Together, owning these funds will benefit from disruptive trends without piling into stocks of well-known consumer software or hardware brands.
The Global X Robotics & Artificial Intelligence ETF (BOTZ 0.06%) is allocated across 32 companies from developed countries that engage in the development or production of robotic and AI technologies, though it carries a relatively high expense ratio. The Global X Artificial Intelligence & Technology ETF (AIQ +0.63%) is another fund that will provide some overlapping exposure, but with more focus on AI for big data analytics rather than robotics. The Defiance Next Gen Connectivity ETF (FIVG +0.60%) invests in companies that will enable the expansion of 5G networks around the world, including semiconductors, network hardware, specialized REITs, and service providers. The Global X Internet of Things ETF (SNSR +0.80%) capitalizes on similar trends via the proliferation of connected devices and the networks that support them. Cybersecurity is slated to take on increased importance as sensitive data is transmitted among consumers and businesses, making the First Trust NASDAQ Cybersecurity ETF (CIBR +0.85%) a compelling niche play.
Services that improve the ease and efficiency of financial payments, transfers, remittances, investments, and banking have put the fintech industry on the map in recent years, and it is fair to assume that innovation in this space will continue to create value for individuals, small business, and enterprise alike. The Global X FinTech ETF (FINX +2.04%) is an attractive option to gain liquid exposure across the varied niches within emerging financial technology.
Also consider the growth portion of major indexes
The S&P 500 has never delivered negative net returns over any rolling 15 year period, so most financial planning strategies assume positive appreciation over a 30- or 40-year frame. If we can assume that the S&P will reliably rise over a long time frame, then gaining disproportionate exposure to the high-growth portion of the index could be a winning strategy for Roths. The Vanguard Growth ETF (VUG +0.23%) uses a rules-based methodology to select hundreds of U.S.-based large- and mid-cap stocks, and this fund offers liquidity with a low expense ratio. Holders will experience more volatility than with most index funds and feel some hurt during bear markets, so investors should confirm their risk tolerance when considering this ETF.
Growth in emerging markets is expected to be another important financial trend. More than 80% of the global population lives in emerging markets, the average GDP growth rates in those regions is nearly double that of developed markets, and emerging markets tend to have substantially younger populations than developed economies. Expanding middle classes with more disposable income and young families should instigate a relative economic boom, and exposure to companies serving these markets could augment growth over the coming decades. There are numerous great options to invest in emerging economies, but the Vanguard FTSE Emerging Markets ETF (VWO +0.45%) is reputable and highly liquid, with a low expense ratio.
