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Top ETF Picks for Your IRA

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With the tax filing deadline of April 17 a few days away, investors still have some time to make contributions to their individual retirement accounts (IRAs) for the 2017 tax year.

IRAs allow investors to buy individual stocks, bonds, ETFs or mutual funds.  ETFs are becoming increasingly popular with investors due to their low cost, transparency and tax efficiency.

ETFs are excellent tools for retirement investors as well since they provide an easy way to build a diversified portfolio at a low cost. Further, income paying ETFs are better placed in an IRA as income is sheltered from taxes.

Before investing for retirement, investors need to assess their investing goals, time horizon and risk tolerance. (Read: Earnings Weighted ETFs to Tap 7 Year Growth)

Investors need to remember that performance of an investment portfolio depends mostly on asset allocation, i.e. how an investor allocates money among major asset classes such as stocks, bonds, alternative assets and cash.

Low-cost, broad, diversified funds are more suitable for retirement investors as core, long-term investments rather than costly, narrow-focused or niche ETFs, which should mainly be used as shorter-term tactical trading vehicle.

Expense ratio of an ETF should be an important consideration in retirement investing, as in the long-term, cheaper funds can significantly outperform their more expensive counterparts, other things remaining the same. (Read: 5 ETF Ways to Hedge Your Portfolio Against Volatility)

Here are some ETFs that are excellent long-term investments for retirement accounts:

iShares Core S&P Total U.S. Stock Market ETF (ITOT - Free Report)

ITOT is a convenient way to get exposure to the entire US stock universe, ranging from some of the smallest to largest companies at an extremely low cost of just 3 basis points.

It holds more than 3,600 stocks in its basket and should be a core holding in any long-term focused portfolio. Apple (AAPL - Free Report) , Microsoft (MSFT - Free Report) and Amazon (AMZN - Free Report) are its top holdings.

iShares Core Dividend Growth ETF (DGRO - Free Report)

The product holds companies that have a history of consistently growing their dividends and are likely to continue growing dividends. Holdings are weighted by dividend dollars.

I believe that companies with uninterrupted dividend growth record usually have solid balance sheets and strong cash flows. So, these strategies outperform the market over time and also provide stability and downside protection during market downturns, in addition to growing income streams.

 

 

 

The ETF doesn’t have a lot of exposure to rate sensitive sectors and would be a good choice for investors worried about the rising rate environment.

It has a low expense ratio of 0.08%. Johnson& Johnson (JNJ - Free Report) , Pfizer (PFE - Free Report) and Apple (AAPL - Free Report) are top holdings. (Read: BlackRock to Launch Gun Free ETFs)

Schwab U.S. Large-Cap Value ETF (SCHV - Free Report)

Numerous academic studies have shown that value stocks have delivered higher returns with lower volatility compared with growth stocks over the long term in almost all the markets studied. Given their proven performance over long term, value stocks and funds should be a predominant part of any ‘core’ portfolio.

SCHV provides broad exposure to large-cap U.S. stocks with value style characteristics. It has an expense ratio of just 4 basis points, while the dividend yield at 2.5% is quite attractive.

Microsoft, J P Morgan (JPM - Free Report) and Johnson & Johnson (JNJ - Free Report) are the top holdings.

iShares Core MSCI Total International Stock ETF (IXUS - Free Report)

Any well diversified portfolio should have some exposure to international stocks. IXUS is an excellent way to get exposure to large, mid and small cap equities in international developed and emerging markets.

It has a low expense ratio of 11 bps and holds more than 3,400 stocks in its basket. Top holdings include Tencent, Nestle and Samsung.

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