3 Great ETFs For An IRA In 2024

Daniel Sotiroff: ETFs are generally tax-efficient—that’s one of their biggest selling points. But their ability to defer taxes on capital gains doesn’t really cross over to assets that throw off a lot of dividends or interest that are taxed as regular income, like bonds. Those are best parked in a tax-deferred account, like an IRA, which defers or eliminates taxes owed on regular cash payments. With that in mind, let’s take a look at three bond ETFs that many investors could use as a core holding.

3 Great ETFs for an IRA in 2024

1. Vanguard Core Bond ETF VCRB
2. Fidelity Total Bond ETF FBND
3. iShares Core Total USD Bond Market ETF IUSB

I’ll kick things off with a new kid on the bond ETF block. Vanguard Core Bond ETF, which trades under the ticker VCRB, was just launched in December. In typical Vanguard fashion, this ETF’s main advantage is its rock-bottom fee. Vanguard charges just 0.1% per year, making VCRB one of the cheapest actively managed core bond ETFs available. Charging less lowers the hurdle for Vanguard’s fixed-income managers. They don’t have to take unnecessary risks to overcome a steeper fee.

This is an actively managed ETF, so it will look and perform a little different from the broader bond market. Vanguard’s portfolio managers try to take advantage of opportunities when they’re appropriate and fit within the strategy’s constraints. Most of the time they’ll stick to investment-grade bonds with lower credit ratings and slightly higher yields. Every so often, they may go after bonds outside of the investment-grade universe to improve performance, but their allocation to these riskier bonds is limited to just 5%. That said, expect this fund to behave a lot like the Bloomberg US Aggregate Bond Index with some small advantages in the form of a mildly higher yield and total return over the long term.

Keeping with the bond ETF theme, Gold-rated Fidelity Total Bond ETF, ticker FBND, is another great core bond ETF to consider for your IRA. It’s a potentially riskier strategy than VCRB, but it comes with a higher expected return. Fidelity’s managers can invest a larger fraction of the portfolio in high-yield bonds when the risk/reward trade-off looks favorable.

You’ll pay a slightly steeper fee for this ETF. Fidelity charges 0.36% percent per year. And so far, it’s been worth the additional cost. FBND beat the Bloomberg US Aggregate Bond Index by more than 0.7 percentage points per year after fees from its October 2014 launch through the end of 2023.

Gold-rated iShares Core Total USD Bond Market ETF, ticker IUSB, is the third ETF that’s a good match for your IRA. Unlike VCRB and FBND, IUSB tracks an index—the Bloomberg U.S. Universal Index. It’s also the cheapest of the three ETFs for today, with an expense ratio of just 0.06%.

IUSB is a great index-tracking alternative to typical core bond ETFs, like Vanguard Total Bond Market ETF. It’s something to consider if you’re willing to take a little more risk in exchange for a little more reward. The index it tracks casts a wider net than Vanguard Total Bond Market, so it includes bonds with below-investment-grade credit ratings and others issued in emerging markets. But it isn’t swinging for the fences. Treasuries, mortgage-backed bonds, and investment-grade corporate bonds still make up the core of its portfolio.

Watch “What’s in Store for Vanguard’s Funds, ETFs, and More in 2024″ for more from Daniel Sotiroff.