There are a variety of investment options from which to choose in constructing a portfolio for a Roth IRA, a type of tax-advantaged retirement account. Most investors who are saving for retirement and looking to build a long-term, buy-and-hold portfolio will want a mix of stocks and bonds. Investing in a single broad stock index fund and a single broad bond index fund will suffice. But the precise mix of stocks and bonds will depend on two primary factors: how far the investor is from retirement and how risk-averse they are. The further an investor is from retirement, the more volatility they will be able to tolerate. They thus may want to hold more stocks in their portfolio. However, investors with a low risk tolerance may not be able to handle big swings in the value of their portfolio, no matter how many years left they have until retirement. As a result, they will want bonds to make up a greater proportion of their portfolio.

Traditional investing wisdom has been that a 60/40 portfolio—60% stocks and 40% bonds—will satisfy the needs of most investors, and that the proportion of stocks relative to bonds should shrink as the investor ages. Another traditional yardstick for investors has been “100 minus your age:” a 30-year old, for example, should hold 70% stocks and 30% bonds; and by age 40, they should have the 60/40 portfolio. But times have changed and these traditional approaches no longer hold for many financial advisors and prominent investors, including Warren Buffett. Today, many financial advisors recommend that holding a higher percentage of stocks throughout an investor’s career can greatly enhance potential returns while only marginally increasing the risks. But investors should always consider their own financial needs and appetite for risk before making any investment decision.

Below we look at three of the best mutual funds for Roth IRAs, which were selected from a list of index funds on Morningstar’s website. The list was comprised entirely of mutual funds that have several key characteristics. They are: open to new investors, require a minimum investment of $1000 or less, have $50 million or more in assets under management (AUM), and carry no fund load. Zero exchange-traded funds (ETFs) were included in the list. Index funds mimic the performance of an index by passively investing in the securities included in the index. There is strong statistical evidence that index funds outperform actively-managed funds over the long term, mainly due to the difference in their costs. The top three funds on the list below are the three with the lowest costs within their respective fund category. They were selected because cost is one of the biggest determining factors in choosing a fund to be held long-term.

Another way that investors can gain exposure to index funds through their Roth IRA is by investing in index-focused ETFs.

Key Takeaways

  • Fidelity ZERO Total Market Index (FZROX) is the best U.S. stock index fund.
  • Fidelity U.S. Bond Index (FXNAX) is the best bond index fund.
  • Fidelity ZERO International Index (FZILX) is the best international stock index fund.

The expense ratio for FZROX and FZILX is as of Dec. 30, 2021, and as of Oct. 30, 2021, for FXNAX. AUM, 1-year trailing total return, and 12-month trailing yield for each fund is as of March 4, 2022.

  • Expense Ratio: 0.00%
  • Assets Under Management: $12.7 billion
  • 1-year trailing total return: 12.9%
  • 12-month Trailing (TTM) yield: 1.17%
  • Inception Date: Aug. 2, 2018

FZROX is the top mutual fund, based on the lowest fees, within the category of U.S. stock index funds. It is considered a total market fund, which means that it seeks to replicate the entire equity market, including small- and mid-cap stocks. Total market funds, however, are still mostly comprised of large cap stocks because they are typically capitalization-weighted, and thus large caps receive the biggest weighting due to their size. Because of the inclusion of small- and mid-cap stocks, total market funds are likely to exhibit slightly greater volatility and returns than a purely large cap index fund. More risk-averse investors who wish to minimize volatility might consider the Fidelity ZERO Large Cap Index (FNILX) fund, a zero-fee fund that tracks large cap stocks.

FZROX tracks the Fidelity U.S. Total Investable Market Index, a float-adjusted market capitalization-weighted index that seeks to track the performance of the entire U.S. equity market. The index is constructed by Fidelity and does not exactly replicate popular benchmarks like the Dow Jones U.S. Total Stock Market Index or the S&P 500 Index. But Fidelity’s proprietary index’s differences with the Dow and S&P 500 are small and its market performance has historically been similar. Investors who have concerns about the Fidelity index’s methodology might consider the Fidelity Total Market Index (FSKAX) fund or the Fidelity 500 Index (FXAIX) fund. Both of these funds track the Dow Jones U.S. Total Stock Market Index and S&P 500 Index, respectively.

FZROX is comprised of 2,631 holdings, as of Dec. 31, 2021. The majority of those holdings are large cap stocks, which make up approximately 90% of the fund’s total assets. About 8% are mid cap stocks and the rest are either small or micro caps. The mean market cap of the fund’s holdings is $20.5 billion. The fund is managed by lead portfolio manager Louis Bottari and co-manager Robert Regan. Both have managed the fund since its inception in August 2018.

A broad-based equity fund like FZROX carries a certain degree of risk, but it also provides investors with fairly strong growth opportunities. For many investors, this mutual fund may act as the foundation of a well-diversified investment portfolio. However, for those with a very low risk tolerance or who are approaching retirement, a more income-oriented portfolio may be a better option.

  • Expense Ratio: 0.03%
  • Assets Under Management: $57.7 billion
  • 1-year trailing total return: -1.8%
  • 12-month Trailing (TTM) yield: 1.86%
  • Inception Date: March 8, 1990

FXNAX is the cheapest bond mutual fund within the category of bond index funds. It seeks to track the Bloomberg Barclays U.S. Aggregate Bond Index, which is a broad-based benchmark used to gauge the performance of the U.S. investment grade bond market. The fund invests at least 80% of its net assets in securities included in the index. It then employs a statistical sampling technique based on duration, maturity, interest rate sensitivity, security structure, and credit quality to replicate as best as possible the performance of the index with a smaller number of securities. FXNAX is managed by Brandon Bettencourt, who has managed the fund since May 2014, and by Richard Munclinger, who has managed the fund since October 2020.

The fund is comprised of 8,317 holdings, as of Dec. 31, 2021. U.S. Treasurys account for 39.6% of total holdings, followed by a 27.5% allocation to pass-through mortgage-backed securities (MBS), and 25.0% allocated to corporate bonds. The remaining 8.0% of holdings are comprised of U.S. Agency debt, other domestic and foreign government-related debt, asset-backed securities (ABS), commercial MBS, and cash. Virtually all of FXNAX’s holdings are considered investment grade with a BB rating or higher.

A broad-based bond or fixed-income fund like FXNAX is generally less risky than an equity fund. However, bond funds don’t provide the same growth potential, which means generally lower returns. They can be useful tools both for risk-average investors and as part of a portfolio diversification strategy.

  • Expense Ratio: 0.00%
  • Assets Under Management: $3.1 billion
  • 1-year trailing total return: -5.1%
  • 12-month Trailing (TTM) yield: 2.77%
  • Inception Date: Aug. 2, 2018

FZILX is the cheapest mutual fund among international stock index funds. It seeks to track the total-return performance of foreign developed and emerging stock markets by investing at least 80% of its assets in the Fidelity Global ex U.S. Index as well as depositary receipts representing securities included in the index. The index is a float-adjusted market cap-weighted index that aims to gauge the performance of non-U.S. large and mid cap stocks. It is also one of Fidelity’s proprietary stock indexes. The fund uses statistical sampling techniques based on capitalization, industry exposures, dividend yield, price/earnings (P/E) ratio, price/book (P/B) ratio, earnings growth, country weightings, and the effect of foreign taxes in order to replicate the performance of the index as best as possible.

Of FZILX’s 2,386 holdings, 83.7% are large cap stocks, 15.4% are mid cap, and 0.8% are small cap. Japanese equities comprise about 16.0% of the fund’s holdings, followed by equities based in the U.K. (8.7%), Canada (7.6%), China (6.8%), France (6.7%), Switzerland (6.0%), Germany (5.3%), Taiwan (4.5%), Australia (4.3%), and a host of other developed and emerging markets. The fund is managed by lead portfolio manager Louis Bottari and co-manager Robert Regan. Bottari and Regan have managed the fund since its inception in August 2018.

Consistent with modern portfolio theory, risk-averse investors will find that investing in a broad-based equity fund and a broad-based bond fund provides a significant degree of diversification. Furthermore, the combination of a U.S. stock index fund, an international stock index fund, like FZILX, and a bond index fund provides an even greater degree of diversification. Such an approach tends to maximize returns while minimizing risks.

Can I invest my Roth IRA in mutual funds?

Yes. Mutual funds are a very good investment option for Roth IRAs. The combination of a broad-based stock mutual fund and a broad-based bond mutual fund serves as a good foundation for a Roth IRA.

What index funds should I invest in for my Roth IRA?

A good starting place for most investors looking at index funds for their Roth IRAs are low-cost broad-based stock or bond index funds. Cost should be a major determining factor for investors looking at long-term investment options. For the stock fund, investors might consider the Fidelity ZERO Total Market Index (FZROX) fund, a low-cost U.S. stock index fund, or the Fidelity ZERO International Index (FZILX) fund, a low-cost international stock index fund. For the bond fund, investors may consider the Fidelity U.S. Bond Index (FXNAX) fund, a low-cost bond index fund.

Can I have multiple Roth IRAs?

Yes. There is actually no limit to the number of Roth IRAs an individual can have. However, increasing the number of Roth IRAs does not increase the amount that one can contribute each year. Whether it be one lump-sum contribution in a single Roth IRA or multiple smaller contributions in several Roth IRAs, the total amount that can be contributed each year does not change.

The Bottom Line

Most investors saving for retirement through a Roth IRA will want some combination of stocks and bonds. This combination can be achieved by investing in a broad stock index fund and a broad bond fund. A good place to start is a U.S. stock index fund and a bond index fund. For investors looking to diversify further into international stocks, an international stock index fund is a good option. The three top mutual funds by lowest costs that fit these categories include: the Fidelity ZERO Total Market Index (FZROX); Fidelity U.S. Bond Index (FXNAX); and the Fidelity ZERO International Index (FZILX).

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