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3 Funds for IRA Contribution Season

Andrew Daniels, CFA, CMA
Phillip Yoo, CAIA

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. The first part of the year is IRA season because you have until your tax filing deadline, April 17 in 2018, to make an IRA contribution for the previous year. Doing so is a good way to accumulate additional tax-sheltered savings. The contribution limit for the 2017 tax year is the same as it was in years past: $5,500 if you are under age 50 and $6,500 if you are over 50.

If you have a time horizon of at least 10 years and you are looking for a core long-term holding that you will add to in the years ahead, it's hard to go wrong with a very inexpensive total stock market index fund or exchange-traded fund. Such funds don't require much oversight and have historically generated competitive returns relative to higher-cost actively managed funds.

Adam McCullough: Schwab Total Stock Market Index is a great fund for investors looking for U.S. equity exposure in one fell swoop. This fund earns a Morningstar Analyst Rating of Gold and derives its edge due to two primary components.

The first component is that it's broadly diversified and accurately represents the U.S. stock market. The second is its low fee. Schwab only charges 3 basis points for this fund and has no investment minimum, so it's one of the cheapest and most accessible funds in the Morningstar large-blend category.

The fund further reduces its transaction costs by using sampling instead of owning all the stocks in the index that it tracks, which is the Dow Jones U.S. Stock Market Index. By doing this, the fund can gain exposure to the entire U.S. stock market without having to transact in the smallest and most illiquid U.S. stocks.

But this fund isn't without risk. Because it remains fully invested, it will feel the full brunt of a market downturn. For example, this fund lost more than 55% during the bear market from October 2007 through March 2009, more than the average fund in the Morningstar large-cap blend category. But since it remained fully invested, it experienced the complete rally of the market.

For investors looking for total U.S. stock market exposure in one fund, Schwab Total Stock Market Index is an excellent choice.

Benz: You can also use your new IRA purchases to help fill in gaps in your portfolio. Foreign stocks are a key area where many U.S. investors tend to be underweight. I like the idea of using a broadly diversified foreign stock fund with ample exposure to emerging markets. You can use an index fund for this or you can employ an actively managed fund.

Andrew Daniels: Dodge & Cox International Stock benefits from a deep investment team, a decisive value approach, and low fees. The fund remains a top option for international equity exposure. The fund's eight comanagers have been with the firm for an average of more than 20 years, and they are supported by a deep analyst team, most of whom have also been with the firm for their entire careers.

The team seeks non-U.S. stocks that look cheap on a range of valuation measures relying on bottom-up fundamental analysis. The team is also long-term-oriented, so portfolio turnover remains low. The fund had an outstanding 2016, but did lag peers in 2017 due to poor stock selection within the energy sector. Despite recent underperformance, the fund remains poised to outperform over a full market cycle.

Benz: If you are nearing or in retirement, remember that inflation can have a corrosive effect on your portfolio. Consider adding an inflation-protected bond fund to your IRA to help maintain the purchasing power of your assets. Such bonds are inefficient, making them ideal IRA holdings.

Phillip Yoo: Vanguard Short-Term Inflation-Protected Securities Index Fund is one of the cheapest and well-managed TIPS funds available, which underpins its Morningstar Analyst Rating of Gold.

The fund tracks the market-cap-weighted Bloomberg Barclays U.S. Treasury Inflation-Protected Securities 0-5 Year Index. The portfolio's short duration reduces its interest-rate risk and provides a high correlation to immediate inflation changes. But it also leads to a lower yield. However, the fund outperformed two thirds of its inflation-protected bond peers in the last five years through December 2017, thanks to its cost advantage. Its 16-basis-point fee is hard to beat.