Exchange Traded Fund (ETF) appropriate for IRA accounts?

Question

Exchange Traded Funds (ETF) have certain benefits over mutual funds regarding end of year capital gains taxes.

Is it appropriate to invest in ETFs with a tax deferred IRA account?

Or is it better to invest an IRA account in a mutual fund?

Answer 1

Go with ETFs for the IRA.

Answer 2

There are no taxes paid on gains in an IRA account...so whether your money is in ETFs or funds or individual stocks it has no bearing on which is " best".

I'm of the opinion that a good managed mutual fund ...a sector fund, not an index fund is the better tool for your IRA. ETFs , by design, are invested very, very, broadly in the particular " focus" of the fund...invested in as many " losers" as " winners". A " managed"  mutual fund on the other hand has a staff of analysts, observers, chartists working to keep the best performing companies in their sector and culling ( selling off) the laggards.

If a sector is so " hot" that everything goes up...your ETF does as well as a mutual, but in your " average" sector, the mutual fund does slightly more for you... that's why there is a fee involved...it is nothing to get alarmed about...( usually under 1.5%...for returns in teens, twenties and better)  Just another aspect of life where " you get what you pay for"...buy cheap oil for your car...wait too long between changes.. you're only asking for trouble.... buy a cheap faucet for your kitchen...watch it corrode away.... pull those cheap Chinese socks on after a few washings...ooops! your toes come right through...

Your IRA should be treated like your best girl... get the real quality gifts, not imitations. ( ..and you'll get better results in the long run.)

Answer 3

EFTs are basically a cheap version of what a mutual fund does for you. When you invest money in either one, you want to invest money in the "stock market", for example. Most mutual funds do not perform better than the "stock market" as it is represented by an index such as the S&P 500 or the Dow Jones Industrials Average. On top of that, mutual funds charge you higher fees than ETFs. In contrast to that, ETFs not only charge lower fees, they are also guaranteed to perform (almost always) as well as an index. They will never underperform significantly as a much more expensive mutual fund may do. Therefore, ETFs are on average a much better investment choice in any account whether you invest the money through a regular stock account or an IRA account.

Answer 4

The "tax benefits" of ETFs mean nothing in a retirement account.  If you are going to make periodic contributions, you're probably better off with a regular mutual fund IRA held directly by the MF house.  With ETFs, you have to pay a broker fee (like buying stocks) with each purchase.