Self-Directed IRA Expert: Horizon Trust BlogSeptember 21, 2022by horizontrustCan I Invest in an ETF with My Roth IRA?

Investing as a method of getting additional income has always aroused genuine interest among professional investors and the general population. 

At present, the diversity of investment tools is quite extensive, allowing investors to select the most suitable option for investing money for themselves. Still, many novice investors encounter the challenge of competent diversification of their investment portfolio

Therefore, ETFs serve as a classic and advantageous way of starting an investment activity with minimal financial and time costs.

Why does this method help create a reliable capital cushion and eliminate the financial risks, and how can you invest in ETFs via the Roth IRA account? Let’s find out what the benefits of investing in ETFs are.

 

What Is ETF?

 

Exchange-traded funds (ETFs) are a cost-effective type of investment in stocks or commodities of a particular region or sector that are gradually becoming increasingly popular in the global financial markets. 

This investment tool allows one to acquire a block of shares or other securities (commodities, bonds, interest rates, currencies, etc.) specifically chosen according to a predetermined principle, to facilitate investments in a particular economic sector. Consequently, the major difference between ETFs from other financial instruments is the potential to invest in stocks or securities of several companies at once. 

By purchasing or selling ETFs, a shareholder deals with a basket of certain assets similarly and performs the same types of transactions available for conventional stocks or futures in exchange trading.

 


 

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What Are Some of the Top-Performing ETFs?

 

To properly evaluate a potential investment opportunity, it is necessary to conduct a performance analysis of stock portfolios over the past few years and consider the market index that shows the value of a particular set of securities. Based on these indicators, the following companies have great potential for development:

 

The SPDR S&P 500 ETF Trust

 

The undoubted leader is the SPDR S&P 500 ETF Trust, marketed under the S&P 500 Index and holds stocks of more than 500 top-ranked U.S. companies. It was established in 1993, providing one of the most liquid and diverse trade portfolios among all the investment funds in the world and holding net assets of $374.03 billion.

The list of the top components of the S&P 500 Index includes Microsoft Corp., Apple, Amazon, Facebook, Johnson & Johnson, Visa, and many more. 

 

The Vanguard Russell 2000 ETF (VTWO)

 

The Vanguard Russell 2000 ETF (VTWO) is a fund that offers SME stocks and is shaped based on the Russell 2000 Index, excluding the 1000 largest U.S. companies to form its portfolio of the next 2,000 stocks. Its total net assets comprise $7.5 billion, including shares in AMC Entertainment Holdings Inc., Avis Budget Group Inc., Lattice Semiconductor Corp., Crocs Inc., and others.

 

Invesco QQQ

 

One of the largest exchange-traded funds aimed at investing in technology is the QQQ by Invesco. In particular, 48% of the shares owned by the fund accounts for technology and 19% for communication services. 

In addition, this fund is directly linked to the Nasdaq-100 and includes stocks of the top 100 companies listed on the Nasdaq technology exchange.  

Is Investing in ETFs Wise for 2022?

 

Due to the volatile position of the current stock market, ETFs represent an investment tool that can keep your money safe. What is more, by investing financial assets in ETFs, investors can enjoy a range of the following benefits through this alternative source of income

 

Portfolio Diversification

 

An ETF implies complete diversification of an investor’s portfolio and comprises dozens or even hundreds of securities assembled by fund managers following a particular strategy. Such diversification dramatically contributes to the economic balance of assets and the stability of profit generation. 

Besides, ETFs aim to reduce exposure to potential losses because the set of stocks and securities of different companies in one stock portfolio allows covering losses caused by a decline in the price of specific stocks at the expense of other securities that significantly increased in price during the same period.

Exchange-traded funds provide access to alternative assets, allowing investors to purchase a ready-made basket of assets in a single investment, conveniently diversify investment risks, and invest in economic sectors without choosing specific securities. 

Thus, they do not limit discretion and present great flexibility to the investor, who can acquire shares of the largest companies of one country, shares of a particular sector in a group of countries, or shares of companies representing entire regions.

 

The Low Entry Threshold

 

Thanks to the low entry threshold, investors have the unique prospect of becoming full co-owner of the entire property in a proportion equal to the amount of their investment without having significant financial resources for the initial investment in the funds. 

Besides, compiling an investment portfolio of this scale without any assistance can cost tens or even hundreds of thousands of dollars.

 

Accessibility and Transparency 

 

Most management companies keep transparent records, reporting on the assets of the exchange-traded fund. In addition, professional managers, adhering to the stated fund strategy, undertake to monitor the share prices of individual companies and periodically rebalance the investment portfolio. This way, the investor is always aware of the current state of affairs.

 

Significant Tax Saving

 

A private investor must pay income tax when receiving dividends from stocks and securities. Exchange-traded funds also receive dividends on securities in their portfolios, but in most cases, they are tax-free. 

Funds often use dividends to acquire new securities, increasing the fund’s total value.

 

How to Invest with Roth IRA in an ETF?

 

To build retirement savings, novice investors sometimes resort to Roth Individual Retirement Accounts to make their savings grow in the long term. An ETF in an IRA account enables retirement investors to buy and sell stocks, bonds, or other securities, control the retirement planning process, and make the right decisions while saving for retirement.

Roth IRA is an individual retirement plan that generally resembles traditional IRAs. Still, there is one distinction between them, which lies in how they are taxed. Roth IRAs are funded with post-tax assets, meaning no further withdrawals are subject to taxation. In contrast, traditional IRAs involve tax-free deposits, but you should consider that a certain amount of taxes will be deducted when withdrawing funds. 

This way, a Roth IRA tax-deferred account provides the ultimate investment scenario. Once dividends are received or shares are sold, the total amount deposited will increase but will not be taxed upon making a withdrawal.

 

It Is Easy To Invest With Roth IRA

 

At their core, ETF funds allow investors to benefit from alternative investment tools for generating passive income and comfortable retirement. Acquiring a share portfolio using this type of fund is much easier than buying individual stocks and bonds and definitely provides a number of the advantages mentioned above. 

Even though the investing process features two controversial essential qualities, profitability and risk, this form of passive income is only gaining popularity. Horizon Trust provides advisory services on selecting the right investment tools to reduce risks and obtain the proper investment portfolio. 

Contact us today for additional information.

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