3 index funds that are perfect for your IRA

Whether you are in your 20s and just starting to invest or nearing retirement, investing your IRA in index funds is a smart strategy. You benefit from automatic diversification, low fees, and huge long-term growth potential.

Your best bet is to choose index funds that give you broad exposure to national stocks, as well as some international exposure if you want additional diversification. Here are three index funds that are great for IRA investors of any age.

Source: ETF.com. Returns from November 20.

1. Vanguard 500 Index Fund ETF

There are no guarantees in the stock market, but investing in a low-cost S&P 500 index fund like the Vanguard 500 Index Fund ETF is about as close as it gets. Over the past 30 years, the S&P 500 Index has produced average annualized returns of just over 8% when you adjust for inflation.

If you had invested in the S&P 500 anytime over the past 100 years, you would have made money every time if you kept the money invested for at least 20 years. If you invested $ 500 per month in the S&P 500 Index and got an 8% annual return, you would have well over $ 1.1 million after 35 years.

This fund has an expense ratio of 0.03% which means that only $ 0.30 of an $ 1,000 invested is used for expenses. It’s even cheaper to own than the ETF SPDR S&P 500, the flagship S&P 500 fund, which has an expense ratio of 0.09%.

2. ETF Schwab US Broad Market

If you want to go beyond the bigwigs of the S&P 500 Index, check out the Schwab US Broad Market ETF. The fund tracks the Dow Jones US Broad Stock Market Index, which means that you will automatically invest in around 2,500 of the largest publicly traded companies in the U.S. With an expense ratio of just 0.03% it is just as inexpensive to own as the Vanguard. ETF S&P 500.

The advantage of choosing a broad market index fund for your IRA over an S&P 500 index fund is that you get exposure to small caps. Small cap stocks are generally riskier, but have greater growth potential.

While a broad market index fund gives you a bit more diversification than an S&P 500 index fund, adding SCHB to your IRA won’t give you much additional diversification if you already have S&P 500 funds. C it’s because there is so much overlap in the larger farms. Like the S&P 500, the Dow Jones US Broad Stock Market Index is capitalization weighted, so smaller stocks have limited influence on fund performance.

The eight main stocks of this ETF and the Vanguard S&P 500 ETF are identical: Apple, Microsoft, Amazon, Facebook, Alphabet Inc. Class A and C shares, Berkshire Hathaway Class B shares, and Johnson & Johnson. For the Schwab fund, these main holdings represent just over 20% of the fund’s assets; for Vanguard, they are just over 25%. Since both funds are dominated by the same stocks, you can expect fairly similar returns.

3. Vanguard FTSE All-World ex-US ETF

If you want global exposure, invest in international equities through the Vanguard FTSE All-World ex-US ETF is a good option. The fund has an expense ratio of 0.08% and tracks the FTSE All-World ex-US Index, a mix of approximately 3,500 large and mid-cap non-US stocks.

Over 85% of companies are based in developed economies, such as Japan, Hong Kong and the UK. While investing in predominantly developed countries does not bring the benefits of emerging markets, it is also much less volatile.

While the fund has consistently underperformed the S&P 500 over the past 10 years, investing a small portion of your IRA in this international equity ETF could be a good hedge if you want to diversify beyond US stocks. without too much risk.