Can You Hold ETFs in a Traditional IRA?
Traditional IRAs allow you to invest your pre-tax savings for retirement with greater freedom, including selecting individual stocks and mutual funds as potential investments.
Exchange-traded funds (ETFs) have grown increasingly popular as an accessible and cost-efficient way to gain index or market segment exposure for your portfolio. ETFs trade like stocks throughout the day, making them more liquid than traditional mutual funds.
Inverse ETFs
Many investors are drawn to inverse ETFs because they offer the promise of profiting from falling markets. However, investors should understand their particular risks prior to investing.
These risks include compounding risk, correlation risk and short sale exposure. They typically rebalance daily and incur high fees and commissions.
Leveraged and inverse ETFs differ from traditional ETFs in that they bet against market appreciation; rather than betting on its rise, leveraged and inverse ETFs aim for market decline by employing complex financial tools like swaps and futures contracts – this incurs additional costs that the fund passes along to investors as a higher expense ratio.
Leveraged and inverse ETFs should be used as short-term hedges or bets on the market, investing 10-20% of your IRA into these funds may reduce your risk of an unexpected market downturn.
Leveraged ETFs
ETFs can be an excellent way to quickly build an affordable retirement portfolio, but they do carry certain unique risks.
Leveraged ETFs rely on debt and derivative products to boost daily returns from their benchmark indexes, unlike traditional ETFs which mirror them exactly; for example if the S&P 500 moves up by one percent today then so will its ETF counterpart.
But leveraged ETFs reset their objectives daily, meaning gains and losses can quickly accumulate – which can greatly diminish overall returns. Most investment professionals do not recommend holding leveraged ETFs in an IRA; an IRA should be used solely for retirement savings. Their volatile nature also leads to significant tax implications; gains are taxed at ordinary income rates while losses at capital gains rates – adding yet more cost and risk into an already risky investment portfolio.
Precious Metal ETFs
Precious metals like gold and silver can provide a refuge during times of economic uncertainty, while their rarity makes them highly prized industrial components. ETFs with exposure to precious metals offer an easy, liquid way to invest in these assets compared to physical bullion or futures contracts.
If you want to expand your exposure to multiple precious metals, the abrdn Physical Precious Metals Basket Shares ETF (GLTR) could be an option worth exploring. It tracks gold, silver and platinum prices over time.
However, for an enhanced exposure to one particular metal, consider investing in the SPDR Gold Trust ETF (GLD). This fund tracks the price of physical gold bullion and allows long and short positions; its underlying bullion comes from refiners that are members of London Bullion Market Association or LBMA.
Tax-Efficient ETFs
ETFs have gained a reputation for tax efficiency when compared with mutual funds, due to their lower turnover. This feature enables investors to be protected from other shareholder actions regarding capital gains distributions as well as from creating/redemption events that trigger taxes due to investor demand.
This benefit of ETFs that track broad market indices is especially relevant when investing in core equity exposure; Morningstar has identified several such ETFs, such as Vanguard Total Stock Market Index ETF and Vanguard 500 Index ETF, as excellent choices. BlackRock offers numerous reliable ETFs for U.S. equity exposure through their suite of core ETFs which feature some of the industry’s highest long-term tax efficiency ratings.
ETFs that specialize in precious metals come with specific tax considerations; typically these funds invest in futures contracts and stocks of mining companies rather than actual physical metal.
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