3 Great ETFs for Your IRA in 2023

Tax efficiency is one of the main reasons that ETFs have seen their share of the U.S. fund market swell in recent years. ETFs rarely make capital gains distributions that leave their investors with a tax bill, and when they do, it’s usually a very small one. Keeping taxes under wraps has made ETFs popular tenants of taxable portfolios.

But tax efficiency should not be confused with tax immunity. ETFs don’t fully escape the reach of Uncle Sam. So, investors that want to squeeze every last cent out of their investments can enlist ETFs for their tax-deferred accounts. Here are three excellent ETFs that are well-suited for the extra layer of tax protection that IRAs provide.

3 Great ETFs for Your IRA in 2023

These exchange-traded funds earn a Morningstar Analyst Rating of Gold, Silver, and Bronze.

1) Schwab U.S. Dividend ETF SCHD

2) Dow Jones Global Real Estate ETF RWO

3) Gold-rated iShares Core U.S. AGG Bond ETF AGG

First up is Schwab U.S. Dividend ETF, a carefully crafted index portfolio of disciplined dividend stocks. It trades under the ticker SCHD and carries a Morningstar Analyst Rating of Silver.

Dividend funds are in high demand after navigating a difficult 2022 market better than most. SCHD is among the very best of them.

This fund mines the market for stocks that have paid dividends for 10 consecutive years, rank in the top half of dividend yield, and score well in fundamental metrics like cash flow/total debt. It admits the 100 companies who best fit that description. This constellation of requirements promotes balance: Yield is attractive but often comes with risk, so focusing on fundamentals highlights the firms whose dividends should be the most durable. The results have been tremendous: SCHD ranked in the top 1% of all large-value funds over the 10 years through January 2023.

SCHD would be a welcome addition to almost any portfolio, but the solid yield it delivers makes it a smooth fit for an IRA. Dividends are taxed at lower rates than standard income, but with a current 12-month yield of 3.32% that more-than doubles the broad market, the savings here can pile up.

Next on my list is Bronze-rated SPDR Dow Jones Global Real Estate ETF, ticker: RWO.

Investors that want to introduce global real estate into their portfolio should give RWO a look. The fund takes a cut-and-dried approach that makes it a solid proxy for the global real estate market. U.S. real estate represents about 70% of the portfolio, but holdings from Japan, the United Kingdom, and a host of other countries enhance diversification. Best of all, the fund charges a reasonable fee that makes global real estate investing practical for a wide range of investors.

Most of the fund’s 275 holdings are structured as real estate investment trusts, or REITs. REITs are required to return at least 90% of their taxable income to investors each year. While this income stream can look attractive to investors, it can leave them with a steep tax bill. Stashing a fund like RWO in a tax-deferred account can help shield its precious payouts from the taxman.

The last fund for today is an old standby in the world of fixed-income ETFs: Gold-rated iShares Core U.S. AGG Bond ETF, ticker: AGG.

This ETF tracks the Bloomberg U.S. Aggregate Bond Index, which absorbs taxable, investment-grade U.S. dollar-denominated bonds with at least one year until maturity. The index weights the broad basket of bonds by market value, which pulls it toward those issued by the U.S. government. Treasury bonds’ central role in the portfolio makes it a safer option than most of its peers, but the fund’s ultralow fee—a mere 0.03% per year—should help it measure up well in the long run.

Like most bond portfolios, the lion’s share of AGG’s return comes in the form of coupon payments. Investors keen to reinvest as much as possible of their income may consider holding a fund like this in their IRA.

Watch “3 ETFs for a Recession” for more from Ryan Jackson.