The 3 Best Funds for a Roth IRA

If you ask a thousand investment professionals what the best funds for a Roth IRA are, my guess is you’ll get close to a thousand different answers. Everyone looks at the task at hand slightly differently. I believe the tax-free growth of the Roth IRA means you want to carefully balance risk and reward to ensure you have more than enough funds to withdraw in retirement

The important thing to remember about the Roth IRA is you don’t want to get too aggressive with your investments. That’s because any capital losses you incur generally cannot be deducted against profits. The only way to deduct losses from your Roth IRA is to close your Roth IRA accounts.

Perhaps the best way to reduce risk is through diversification, which is one of the things that makes exchange-traded funds and mutual funds so popular. By holding a basket of investments, these funds reduce company-specific risk.

For today’s picks, I’ve selected two ETFs and one mutual fund that I think are some of the best funds for a Roth IRA to help investors balance risk and reward.

MNA IQ Merger Arbitrage ETF $31.75
IVV iShares Core S&P 500 ETF $400.64
BPTRX Baron Partners Fund $129.75

IQ Merger Arbitrage ETF (MNA)

First up on the list of best funds for a Roth IRA is the IQ Merger Arbitrage ETF (NYSEARCA:MNA), a passive ETF. According to the fund’s prospectus, it tracks the performance of the IQ Merger Arbitrage Index, which “seeks to employ a systematic investment process designed to identify opportunities in companies whose equity securities trade in developed markets, including the U.S., and which are involved in announced mergers, acquisitions and other buyout-related transactions.”

MNA’s top three holdings are Abiomed (NASDAQ:ABMD), STORE Capital (NYSE:STOR) and Activision Blizzard (NASDAQ:ATVI). Of those three, video game publisher Activision Blizzard’s potential takeover by Microsoft (NASDAQ:MSFT) has generated the most buzz. The ETF owns 456,559 shares of ATVI worth around $34.4 million. Like Warren Buffett, MNA stands to make millions should the deal get approved by the Federal Trade Commission and Microsoft pays $95 a share for its stock.

Since its inception in 2009, MNA has delivered an annualized total return of 2.23%, and it has an expense ratio of 0.76%, which is high. However, the ETF deserves consideration for your Roth IRA as an excellent defensive position. 

Year to date, MNA is down 1.6%, considerably better than the SPDR S&P 500 ETF Trust’s (NYSEARCA:SPY) decline of 16.2%. In 2018, the last time SPY was in negative territory in a calendar year, down 4.45%, MNA’s total return was 2.13%. In other words, MNA gives investors bond-like security but with equities.

iShares Core S&P 500 ETF (IVV)

Buffett believes that the typical retail investor ought to buy a low-cost S&P 500 fund and call it a day. There’s no need to get into individual stocks or esoteric thematic funds. 

The iShares Core S&P 500 ETF (NYSEARCA:IVV) is a market cap-weighted fund that tracks the performance of the S&P 500. As a result, its top 10 holdings account for roughly 25% of the portfolio. However, as with the underlying index, tech stocks’ dominance has waned over the past few years. In September 2020, Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOGL, GOOG) and Meta Platforms (NASDAQ:META) accounted for 24% of the index. Today, that’s down to about 18.4%. 

If you’re into equal-weighted ETFs, you could always invest in the Invesco S&P 500 Equal Weight ETF (NYSEARCA:RSP) instead. However, it charges a 0.20% management fee, 17 basis points more than IVV’s 0.03%, so you’ll pay $1.70 more in fees per $1,000 invested.

IVV is not just one of the best funds for a Roth IRA; it’s a foundational piece of any well-constructed portfolio.

Baron Partners Fund (BPTRX)

I’m a big fan of all-cap funds like Baron Partners Fund (MUTF:BPTRX) because the best stocks often come in different sizes. And it pays to own the best, regardless of market capitalization.

BPTRX invests mainly in U.S. companies that have significant growth potential. Managing the fund is long-time portfolio manager Ron Baron, the founder of Baron Funds, and his son, Michael. Between them, they’ve got more than 70 years of experience

In the fund’s Q3 2022 shareholder letter, they note: “We believe this market, while difficult, is beginning to reward high quality companies that are demonstrating good operational performance. The Fund’s ownership of many of these businesses allowed it to perform well in the current quarter. But investors are still shunning companies that are investing for growth and penalizing near-term performance. We believe this provides opportunities for timely investments and future strong returns for many stocks in the portfolio.”

The fund, which has $6.17 billion in net assets, currently holds 30 stocks with a median market cap of $15.92 billion. The top 10 holdings account for 83.3% of the portfolio, with Tesla (NASDAQ:TSLA) by far the most significant holding at a whopping 34%. So, if you don’t like Tesla, BPTRX isn’t for you. 

While this mutual obviously carries more risk than the other two names on this list of the best funds for a Roth IRA, it has an annualized total return of 22.1%. That compares to 12.8% for the SPDR S&P 500 ETF Trust. 

Over the long haul, Baron Partners Fund has proven to be a big winner. 

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.

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