Vanguard Information Technology ETF: What You Need To Know

Vanguard Information Technology Funds

Did you know that there is an institutionalized fund in the country that seeks to track the market index of the information technology sector? One of the greatly renowned funds is the Vanguard Information Technology Fund.  Because of its various holdings and services in the market, its low-cost ratios, and resilience whenever the market takes a hit, this ETF is something that you would want to consider buying and engaging your assets with.

But what is this infotech ETF, and how can this help you as an investor? Read on to find out.

Vanguard Information Technology ETF

Vanguard information technology ETF (also known as VGT ETF or sometimes VITAX ) is one of the most renowned funds that are passively exchanged and passively traded in the market. You can also buy and sell these shares just like individual stocks. The VGT is one that tracks the information and performance of the technology sector, whose holdings give weight to the market cap. This means the bigger the company in the sector, the bigger the percentage allocated to the fund.

The technology sector is one that covers a wide array of companies, including tech-forward service companies, chipmakers, e-payment processing industries, as well as software and hardware companies.

Also, the VGT is a fund that gives opportunities to investors in getting exposed to the largest tech companies in the sector–so if you would want to have a diversified financial-tech portfolio, Vanguard will work best for you.

Why do You Need to Invest in Vanguard Information Technology ETF?

What makes the Vanguard Information Technology Index Fund interesting is that the assets that it holds include stocks that belong to highly-concentrated tech areas inside and outside of the United States. 

They hold tech stocks for small and large companies, but the large ones provide the highest returns and best performances. They also track company indexes that work around the industries of tech-based services and products, as well as tech-based research and development industries.

Vanguard considers the Info Tech Index Fund as one that’s aggressive, and would work well for those investors with a rather high-risk tolerance. The high risks would pose a mixture of both growth and decline on its share prices, which is why it is a good choice if you think that long-term investment is something that would interest you.

One more thing that you would need to know is that Vanguard’s funds are known to have low-cost indexes, amidst a wide selection of both exchange-traded funds as well as mutual funds.

What else are the reasons why we should place our investment in this VGT Index Fund? There are four main reasons:

1) Investment Strategy

An investment strategy is key when it comes to making sure we spend less on overhead expenses, with the most efficient yields and gains at the same time. This Vanguard Info Tech Fund is one that tracks performances and invests on all of the assets included in the stocks that comprise the benchmark index.

Because of the tracked stocks in this index, it serves as a good investment strategy for those who are looking for more extensive exposure in the Information technology sector in and out of the United States.

2) Role in Portfolio

Because of being exposed to a wide array of financial portfolios in the market, Vanguard Technology ETF becomes something highly supplementary to parts of the stock allocation for the investor portfolio. Again, the more exposure to the technology sector, the better the funds’ role becomes for your financial portfolio.

3) Easy Management

Even if this technology ETF is considered to be one that’s aggressive and poses a higher risk for investors, the fund is also considered as one that’s relatively easy to manage. With a low cost and expense ratio, investors are given the opportunity to manage their funds accounts for themselves.

4) Top Performance

Vanguard  Information Technology ETF VGT is also considered to be the prime performer in the market, after having yielded 34.72% of returns just last year. Furthermore, it also yielded a remarkable 23.6$% of returns over the past three years, and 23.56% throughout the past five years. Decade-wise, the fund performed with a yield of 18.95%, given the ten-year data.

As provided by U.S. News.com, the following table shows the performance of the Vanguard fund:

1 month3 month6 month1 year
Vanguard12.52.928.9743.46
MSCI ACWI NR USD12.336.0622.2915.01
Rank in Category69886559
Category (ST)14.819.8334.9549.78
+/- Category (ST)-2.31-7.64-5.98-6.32
+/- MSCI ACWI NR USD0.17-3.876.6828.45
Updated 11/30/20

Things to Consider when Investing in Vanguard Information Technology ETF

 1. Costs and Fees

One thing that you should consider is that there are mutual fund charges as well as expense costs that may hit investors who are in possession of mutual funds. It should be understood that when you run a mutual fund, it will always include operational costs–which include transaction costs, fees for investment advising, as well as expenses on distribution and marketing ventures. Various funds make investors pay for such overhead expense ratio 0 in a wide array of ways. Let’s take a look at a couple of fees:

  • Maximum Sales Fees

The initial sales fees incurred by investors are usually those that are being paid to brokers in the form of a commission. On the other hand, deferred fees are charges incurred when investors choose to redeem their shares from the market.

  • Maximum Fees

Maximum fees are those being charged to fund holders every year (which you could think of just like some sort of annual membership fee).

  • Actual Fees

Vanguard has a very low net expense ratio of 0.1%, where the average expense ratio in the market is at a staggering 1.26%.

Management fees for the fund are pegged at 0.09% amidst the category average of 0.78%.

  • Total Cost Projections

Total cost projections are those that predict how much you, as an investor, can expect to spend in expenses/sales-related charges and fees.

  • Minimum cost on investments

When opening an account for investing, some funds would require a minimum cost on investments, which serves as an initial and principal payment to the fund.

2. Risk Considerations

The next crucial thing that you should consider when engaging your assets in the stocks is the risk. In the context of the Vanguard fund, you should know that it focuses primarily in the information technology sector. Therefore, if there are funds out there that give focus on other equity sectors outside their domain which is on information technology, then it is prone to risk that’s particular to that particular investment.

Investors, in turn, will experience higher volatility because of the lack of diversification caused by the issues impacting the specific sector. Consequently, the impacted sector will manifest into poor performance

  • Volatility Measurements

Volatility measurements are those that serve as a mirror towards risk and uncertainty on the value of the underlying securities involved.

Vanguard’s information technology fund has a standard deviation of 21.108 this year, which shows how varied the returns of the fund are, relative to its average performance over time. Therefore, the higher the returns of the fund, the greater the standard deviation it will gain.

Furthermore, the Sharpe Ratio of the Vanguard Information Technology Fund ETF is pegged at 1.04. The Sharpe Ratio is used in measuring how much risk can an investor expect to take when calculating investment returns.

Lastly, the Mean of the Vanguard Information Technology is set at 1.964 this year. The mean is a metric that makes us understand how well the Vanguard fund performed given data on annualized returns.

  • Modern Portfolio Theory Statistics

Theory statistics are important in understanding the competitiveness of a fund. With modern portfolio theory statistics, comparisons can be made in checking excess returns of the funds vis-a-vis the performance of a benchmark index. Data for this metric are in reference to three years of data on monthly returns.

There are three measures to identify such data: the R-squared, the beta, and the alpha.

What you Need to Remember

One interesting fact: the previous years have been very beneficial to most of the tech-concentrated financial portfolios. Just last year, the Vanguard Information Technology ETF has successfully gained a 48.8% dividend yield. This overpassed the S&P 500 returns on net assets, with only 28.9% that year. 

The Vanguard Information Technology ETF is a cap-weighted financial portfolio as well, despite its median market cap that is topping one hundred seventy billion dollars, which is the 10 largest holdings account, taking up 57% of the financial portfolio.

You also need to remember that Microsoft and Apple Inc are the top two amongst the top 10 holdings in the ETF industry net assets. Because of this, they both serve as the United States’ most valuable publicly listed companies. These companies hold more than 33% of the investments and the ETF portfolio.

Aside from Apple, and Microsoft, you should know that Visa Inc and Mastercard also fall under the next two of the largest holdings in the market. They are benchmarks that the Vanguard ETF is also tracking, as they are heavily involved in electronic payment processing, software development, among others.

Even if Vanguard ETF is an aggressive fund, you won’t have to account for the fall or the rise of the outstanding shares because it works very similarly to how we perceive open-ended mutual funds. The cash balance expands and contracts organically so you wouldn’t have to make active trades all the time, as opposed to a traditional index fund. Plus, the Vanguard ETF has a 5% portfolio turnover rate.

Conclusion

The Vanguard ETF is one that gives investors the best of both worlds. They offer investors a wide array of proven and strong technology-based stocks in the market with very low expense cost ratios. 

The Vanguard ETF will be volatile if the stock market goes through a crisis, and the downfall can suffice if investors trade out of tech stocks. Regardless of all these considerations, if you track the performance of the fund, you will realize that at the end of the day the Vanguard Information Technology ETF is beneficial to the average investor and is worth the buy. 

Given the costs, the exposure, and the opportunities, in the long run, this ETF will totally help boost your asset class, as well as your portfolio.

If you need more information on investing and anything financial-related, let Investoralist help you out! Investoralist is a site that can help you understand, engage, and get empowered on everything related to your finances.

Vanguard Roth IRA: Is It the Best Roth for You?

Vanguard Roth IRA

Retirement isn’t an easy matter for people without prior planning. As you age, you may wonder if you have done enough to your savings plans for peaceful retirement! A terrible fact is most American to-be-retirees are not saving enough and could have work harder and longer to have a decent life in retirement.

The Roth IRA offers one of the solutions to this problem. 

Why Vanguard Roth IRA? 

First, let’s talk about a traditional IRA and a Roth IRA, and you may have heard the differences: A traditional IRA is a tax-deductible plan, you can make deductions about your contributions in your tax return. A Roth IRA is not tax-deductible for contributions but tax-exempt at retirement.

Tax treatments make the principal difference for these retirement plan participants. If you choose Roth IRA, Vanguard accounts offer many benefits other institutions do not provide. 

They include low-cost funds and a wide selection of funds, and so on. Vanguard IRAs have more than 200 funds to choose from, and they are noted for offering low-cost funds in retirement plans.

Whether you are a general or annuity plan participant, you had better consult your tax or investment advisors, or retirement plan sponsors consultants as your first plan for the long-term. The nature of your retirement plan involves investment risks, tax aspects, and other life planning goals. As an investor for your retirement plan, you should talk to your close family member regarding joint plans with you like college savings or other specific life-goal settings.

Significant Benefits of a Roth IRA

Some attractive incentives are drawing people to Vanguard Roth IRAs; they are following but not least of all:

1. Low Costs

It is a truth Vanguard provides low-cost funds in the mutual fund industry. Their average fund fees are 0.1% compared to general funds of 1.5% on average. The benefits are enormous when you are talking about the snowball effects of cost savings by 1.4% expenses. One more thing to note is the low-cost policy also applies to actively managed investments and exchange-traded funds(ETF) besides index funds.

2. Wide Selection of Funds

You can benefit from the vast range of mutual funds within the Vanguard fund family. Just imagine there are more than 3,100 mutual funds for you to choose from, and more than that, costs for the exchange-traded funds are mostly commission-zero on Vanguard Roth IRAs. But you should note you may pay commission for Vanguard funds at other brokers’ accounts.

3. Tax-Free Growth

Unlike traditional IRAs, Roth IRAs grow your assets free of tax. Furthermore, as contributions belong to income after tax, they will not be subject to capital gains and dividend or income tax in the future. That will benefit plan investors and plan participants. Future tax is a strange thing. Besides helping to spiral the asset base, your family members can benefit from an inheritance gift. You should consult your estate lawyer before investing in this plan.

4. Tax-free withdrawals in Retirement

What makes investors or retirees popular is you can withdraw the money free if you meet some criteria like a 5-year rule. According to Internal Revenue Service, provided you are 59 ½ years old and own your Roth IRA for five taxable years after your first contribution, you can withdraw your money from whichever Roth IRA account there is (if any).  

5. Flexible Withdrawals

More than that, retirement plan participants can even withdraw contributions anytime without tax if certain conditions are met. That said, if people can take the money out of their Roth IRA accounts under the conditions: 1. Buying of a first home, 2. Disabled, 3. Dead, 4. Paying certain medical expenses unreimbursed or due to loss of jobs. 5. Paying children higher education expenses. 6. Paying childbirth or adoption expenses.

What are the Pitfalls of a Vanguard Roth IRA

  • Trading Costs

Though most of the trading commission for Vanguard’s funds are low to zero, you may have to pay a commission fee of up to $20 if you buy funds at other brokers other than Vanguard’s. If you intend to frequent trading of your brokerage assets in your Roth IRA account, you may incur a high cost and subsequently hurt your returns. I would suggest you use a buy-and-hold strategy to grow your investments.

  • Fund Minimums

You will find Vanguard brokerage services offers Roth IRA service, but you may be disappointed they impose a minimum investment of at least $1,000. At the same time, other brokers do not have this requirement for retirement plans. It increases the hurdle for people to open a retirement account if they want to directly invest in Vanguard’s mutual funds.

Some Powerful Vanguard Mutual Funds for Your Roth IRA 

When you think of Vanguard funds, you think of low-cost funds and a wide range of choices. However, there are three special funds you should take note of:

1. Vanguard Total Bond Market Index Fund(VBMFX)

The fund invests mainly in the US bond market. The holdings for the bonds are investment-grade and spread across different maturities. The investment goal is to provide a steady income and low volatility for fund investors. Furthermore, the tax for interest payments is also deferred in Roth IRAs.

The yield for the fund is currently 2.63%. It holds more than 8,500 funds in the portfolio with almost $200 billion in assets under management as of October 2018. More than 60% of bonds come from US Government, and the remaining go to corporate sectors of primarily finance and industries. The average maturity is 8.6 years, and the expense ratio is 0.15% low. The required minimum investment is $3,000.

2. The Vanguard Total Stock Market Index Fund(VTSMX)

As the name implies, the fund invests in the US equity market with high volatility. Major long-term investors hold heavy in their portfolios. They offer long-term growth by asset appreciation. The assets under management are more than US750 billion with well-diversified securities of 3,680. The major sectors are technology, finance, healthcare.

3. The Vanguard REIT Index Fund(VGSIX)

The investments of the fund hold real estate projects. It can diversify the risk of owning stocks and bonds. The fund buys office buildings and hotels, and malls for rental income and price appreciations. Besides, it has 31.5% of its portfolio in specialized REITs(Real Estate Investment Trust), of which 14.80% is retail REITs, and 13.5% is residential REITs.

As of Oct 2018, the fund holds 184 stocks and has 59.4 billion under asset management. The unadjusted yield is 4.16%.

Are there other options?

Except for Vanguard funds, there are alternatives available for Roth IRA investors. Through the following plan, participants can change their preferences when they change their goals. Remember to talk to your financial or retirement advisors for opinions suitable for your purposes.

  • Brokers

You can choose traditional or online brokers to open a Roth IRA. Just pay a visit to their stores or official websites for personal investors. It takes not a long time to open an account. Some advantages with a broker account are 1. They have no management fee. 2. However, you have to pay a fee similar to an expense ratio when you buy a mutual fund. 3. You may have to pay a commission whenever you buy or sell an investment though the trend is going towards zero one.

  • Robo-Advisors

A new trend: Robo-advisors help you invest! It’s also called digital advisors. You pay a fee, and a Robo-advisor picks the stocks and bonds for you. If you like things other than human advisors to manage your portfolios, you may give it a try!

  • Banks

A traditional way for people to go is to open a Roth IRA with a bank. There are some pros and cons about bank IRA. CDs( Certificate of Deposits) are offered to their clients for principal investments tools if you have an IRA with them. 

The point is if you have a mid to a long time to retire, you may miss chances for growing your nest eggs as CD yields are much lower than stocks and bonds. 

You should consider the time when planning to invest for your retirement. Though higher volatility, stocks and bonds are ideal candidates for long-term investment tools to grow your assets. 

If you are just several years into retirement, safe and low-yield CDs may be an appropriate option.

Frequently Asked Questions About Roth IRAs

How do I open a Roth IRA?

Opening an IRA is quick and easy. Get some personal information ready like contact number, address, social security number. Choose your provider and select types of investment tools suitable for your unique situations. You can pay visits to providers’ websites to see their latest offers.

How much do I need to open a Vanguard Roth IRA?

Vanguard itself does not require a minimum to open an account. However, the mutual fund you intend to buy may demand a minimum. It depends on individual funds’ minimum criteria. 

Can I open a Roth IRA with Vanguard?

Yes, but you should note income limits and contribution limits are available for tax purposes. You should review the information and consult with your consultants before opening an IRA and invest.

Who has the best IRA?

Every IRA provider has its unique offers and features. Combining the factors mentioned earlier with your circumstances, you can find your suitable IRA. Remember to discuss with your advisors!

Is a Vanguard Roth IRA free?

It is up to the investment tools you plan to adopt. Investors may bear some costs like stock trading fees and mutual fund expenses. Besides, Vanguard will charge $20 for the annual subscription fee if you don’t register for an e-mail statement.

Final Words

A Vanguard Roth IRA is more than just a retirement planning tool for you as an investor. Through their wide range of fund choices and low-cost features, you can grow your asset base for different purposes like education and other life goals.

More than that, you enjoy tax-free growth and flexible treatments at withdrawals from your Roth IRA. You should remember the nature of a Roth IRA: long-term savings account and tax-efficient investments. A participant should consider the two factors in planning their financial future. 

If you make frequent trades in your IRA, you will incur higher expenses due to the selling and buying of assets. Costs related to early withdrawals and tax issues may reduce your returns in a compounding way. The best strategy is buy-and-hold for your investments. Therefore, apart from discussing it with your professionals, you need to research more finance and investment resources. 

Investoralist provides in-depth analysis and detail regarding Roth IRA and other related retirement products for readers to have a clear picture of personal financial planning. Subscribe to the newsletter for more information.  

Roth IRA Fidelity Review: Best Retirement Account for Several Reasons

Roth IRA Fidelity Review

Whether you want to grow your savings or diversify your investment portfolio, a Roth IRA is a great choice that comes with long term tax benefits. Roth IRA is overall the best retirement plan available today that offers tax-free income.

Pros

  • There are no minimums or account fees to open a Roth Fidelity IRA account
  • It offers a large variety of investments choices
  • Trades are commission-free
  • High potential for tax-free withdrawals and growth upon meeting the set conditions
  • Free investment tools such as calculators, apps, and software
  • Extensive information and research data available for investors
  • Some mutual funds have no expense ratio

Cons

  • Some mutual funds are high cost and attract high transaction fees
  • The robo-advisor service charges a higher-than-average annual advisory fee for balances over $50,000 compared to other competitors
  • Fidelity Roth IRA does not provide access to cryptocurrencies, futures, forex, and other riskier assets
  • You have to invest for at least 5 years initially before making any withdrawal

Fidelity Roth IRA is an excellent choice for beginner investors or anyone looking for their first Roth IRA. It offers one of the best self-directed investment platforms, with a wide variety of investment options, and minimal trading fees. 

Features

From tax advantages, maximum contribution, and fees, here are some details that can convince you to consider a Roth IRA. 

Tax advantages: The concept behind Roth IRA is that you make contributions to this account with after-tax money. Once you turn 59½ and have been in a Roth IRA plan for five years, all distributions taken from the plan are tax-free. You can withdraw your contributions without incurring any tax or penalty expenses at any time. 

Maximum contribution: $6,000 ($7,000 if age 50 or older)

Income requirements: In 2021, the upper limits for investing are $125,000 for a single person or $198,000 for married people filing jointly.

Minimum investment: There is no minimum to open the account

Investment options: Fidelity Roth IRA is great for independent investors who want to access a wide range of investments. With Fidelity, you get access to trading stocks, bonds, options, and a vast choice of ETFs. You also get access to great mutual funds both from Fidelity and non-Fidelity.

Support & guidance: When it comes to investing, you are responsible for choosing and managing your investments. Great thing is that you can access all the tools and information that the platform provides.

For the Fidelity Roth IRA, investments are managed for you, using your goals and risk tolerance set in your digital account. You still get to access Fidelity’s information repository, as well as a Fidelity advisor whenever it’s necessary.

Fees: There is no opening cost, closing cost, or annual fee, and offers $0 commission 

Why choose Fidelity Roth IRA?

Beginner-friendly: Fidelity has invested heavily in the platform’s infrastructure to make it easy for customers to find tools and features. Fidelity provides access to a well-developed information section, which builds the confidence of customers who are new to investing.

The platform also makes investing easy through user-friendly layouts for making orders.

No minimum or recurring fees: Fidelity Roth IRA does not charge for account opening or annual fees. The account also offers low transaction fees using an order-routing technology that reduces transaction costs by seeking out price improvement.

Extensive and complete trading tools and resources as a full-service broker: Fidelity Roth IRA offers investors abundant online help and a well-versed chatbot that can respond to any customer queries.

One of the best commission structures at $4.95/trade: Fidelity Roth IRA offers one of the lowest fee structures in trading, at only $4.95 per trade for ETFs, options, and stocks. They also have many commission-free mutual funds to invest in.

Flexible investment types: Fidelity allows you to trade in virtually any type of investment available on Roth IRA.

No expense ratio for mutual funds: 4 of the mutual funds that Fidelity offers have no expense ratio. This means that you can invest in these mutual funds and manage them in your account at zero fees.

Local branches availability: Fidelity has over 140 branches in major cities across the country in case you need hands-on customer service.

Where Fidelity falls short 

Higher fees for some of the mutual funds: Of all the mutual funds available for investing in Fidelity Roth IRA, only 4 of these funds have zero-commissions. However, all other mutual funds attract a $49.95 fee per trade.

Higher pricing with robo advisor competitors: To access robo-advisor services, you pay a 0.035% per annum management fee and the minimum initial investment has to be $5,000 

With Fidelity Roth IRA, you don’t have access to options such as Forex, Crypto, and other riskier assets

Fidelity vs other investment firms

Fidelity

  • Unique feature: Availability of extensive information and resources to learn to trade
  • Commission: 0%
  • Best For: Beginners interested in different investing options

Charles Schwab

  • Unique feature: Access to a robo advising services at no extra management fee
  •  Commission: 0%
  •  Best for: Beginner and advanced traders seeking for no-minimum index funds

TD Ameritrade

  •  Unique feature: Offers a combination of platforms that allows both beginners and experienced traders to access their investments
  • Commission: 0%
  • Best for: Active investing and trading

Betterment

  • Unique feature: Traders have access to automated investing and managed portfolios through robo advising
  • Commission: 0.25%
  • Best for: automated investments that balance a portfolio over time

SoFi

  • Unique feature: Easy investing experience offered through mobile and web platforms.
  • Commission: 0%
  • Best for: Active investing

Best Roth IRA IN 2021

Fidelity Roth IRA tops the list of best Roth IRAs in 2021 for several reasons. The account offers commission-free trading for stocks, ETFs, and more than 3,400 commission-free mutual funds.

In addition to offering the best trading platform with lots of information and research on investments, investors can access a tool suite of calculators and software to help in improving their investments and achieve their retirement goals. These tools include the Fidelity Spire app and Retirement Score Calculator.

When investing in Fidelity Roth IRA, mutual funds are obviously the best investment option to take. One of Fidelity’s solid mutual funds is the Fidelity 500 Index Fund (NASDAQMUTFUND: FUSEX) which has one of the lowest expense ratios of 0.010%.

Individual stocks are the second-best Roth IRA investment. However, it’s necessary that you go for those with high growth potential, even though they may not work out as you expect. 

Other things you need to know

Is Fidelity good for Roth IRA?

The Fidelity Roth IRA ranks as the best for various reasons. First, Fidelity Roth IRA accounts have no minimum account balance or any recurring account fees. The account also offers more than 3,400 mutual funds that attract zero transaction fees and commission-free trade on ETFs and stocks. 

How much does Fidelity charge for Roth IRA?

Fidelity Roth IRA has no opening cost, closing cost or annual fee. In addition, there are no commissions for online stocks, ETFs, and options trades.

How is a Roth IRA different from traditional IRA?

A Roth IRA and Traditional IRA are both great accounts to consider for retirement investing. However, there are key differences between these two accounts that are notable.

While Roth IRA allows you to make after-tax contributions, you can make pre-tax contributions with a traditional IRA.

A Roth IRA is suitable for an investor who expects to be in a higher tax bracket at the time they start making their withdrawals. On the other hand, a traditional IRA is great for an individual who expects to remain in the same tax bracket when starting to make the withdrawals.

The only downside to a Roth IRA is that, unlike in traditional IRAs, there is a cap to the maximum contribution amount allowed.

Does Fidelity Roth IRA payout interest rates?

Fidelity Roth IRA does not pay out any interest as it is not like other traditional savings accounts that are set up in the banks. Fidelity Roth IRA is a type of investment account that holds assets and earns returns depending on how the assets perform.

Who is eligible to contribute to a Roth IRA?

For you to contribute to Roth IRA, you must have earned income. If you are married, you can make spousal contributions even if your spouse does not have earned income.

However, you cannot contribute to a Roth IRA if your income exceeds $140,000. For people under 49 years or younger, you can only contribute up to $6,000. For people above 50 years, the limit to your contributions is $7,000.

What is a Roth Conversion?

A Roth conversion involves making a withdrawal on your 401(k) and traditional IRA and converting it into a Roth. Ordinary income taxes are incurred on the withdrawal amount, but you do not incur early withdrawal penalties.

Roth conversion works for investors who want their income to grow tax-free. 

Anyone can convert their IRA assets to a Roth IRA, regardless of income or marital status.

How much should you consider converting? 

With a conversion, you pay income taxes on the conversion amount. That’s why when determining how much to convert, you have to consider how much money you have saved in non-retirement funds to pay the taxes. Fidelity also suggests converting over a number of years in amounts that will keep your income from the conversion within your current federal tax bracket or within your desired bracket. 

Conclusion

If you are just starting to plan out your retirement plan, Fidelity’s Roth IRA is the best choice for you: it does not have a minimum deposit account and it does not require account opening or maintenance fee. 

Fidelity Roth IRA investment account offers you a unique opportunity to invest in a wide variety of Fidelity investments and manage them all on your own. With the ability to invest in multiple trading options and accrue tax-free income, Fidelity Roth IRA is a great way to invest in your retirement while avoiding high tax liability that other investment options present to traders.

To learn more about financial planning, retirement plans, and a wide range of investment products, subscribe to our newsletter.

Index Funds for Dummies: Beginner’s Guide

Index Funds

Investing can be a daunting task! If you are annoyed by daily market ups and downs as a beginner, I will show you how to make index fund investing successful.

Index fund investing is a suitable fit for dummies or newbies. It provides a hassle-free solution for you to focus more on other essential things in your life. 

In the following, I will explain what you should know about index funds: 

  • the nature and mechanism of index funds
  • the pros and cons of index fund investing
  • how to identify and choose a good index fund; d. finally, I will show you where to find sources on index fund investing.

What is an Index Fund?

An index fund is a pool of funds to build a portfolio of assets by mimicking market indexes’ composition. Let’s take an example of some well-known indexes like the S&P 500 index and Nasdaq composite index.

A manager of an index fund regularly buys and adjusts stocks based on the components of an index, e.g., the S&P 500, according to the combinations of securities in the index.

It is an easy, passive, and no-brainer investment tool for a newbie investor without requiring too many deliberations. In other words: if you invest in the S&P 500 index fund, you have already invested in the most giant 500 corporations in the US. Just imagine how comprehensive your investing plan is!

Major types of indexes for index funds

The famous investing guru, Mr. Warren Buffett, encourages people to invest in index funds regularly and claims it is a safe bet for most people. The late John Bogle, the founder of Vanguard funds – one of the largest index funds in the US, says index fund investing is the most transparent to investors. 

Currently, there are various sorts of index funds available for investors. They include:

  • Nasdaq Composite made up of 3000 stocks listed on the Nasdaq exchange.
  • Dow Jones Industrial Average (DJIA), consisting of the 30 largest blue-chip companies.
  • Bond index: Bloomberg Barclays US Aggregate Bond index.
  • Russell 2000, comprised of US small-cap companies.
  • S&P 500, the largest 500 US companies, is listed on the New York Stock Exchange.
  • MSCI EAFE, consisting of foreign stocks from Europe, Australasia, and the Far East
  • Wilshire 5000 Total Market Index, the largest U.S. equities index

The investment scopes of index funds can even cover more like specialized industries, currencies, and commodities, but they are riskier for non-experts.

Are Index Funds ideal for dummies?

Index funds are a member of a family of mutual funds. They belong to passively managed pools of investments in the indexes and broadly represent movements of market changes. 

As a result of this, index funds have become popular among the general public. They are in use widely for different goals in sorts of stages in life, including:

  1. Retirement: you can buy it through your 401(K) or individual retirement account. You don’t always need to watch your portfolio because market changes reflect your portfolio’s.
  2. Education: shares of index funds are available for sale from mutual fund companies; therefore, you can buy them for your children’s education expenses.
  3. Wealth accumulation: If you want to save for future use or rainy days, you may consider buying index funds through a brokerage house.

Index funds are an easy-go managed tool for beginners if you are just a newbie or dummy in aiming for long-term investing.

How does the Index Fund Work?

As you know, an index fund is a pool of investments made by modeling on the securities of an index like the S&P 500 index. When you buy an index fund’s shares, you acquire all the stock holdings based on the index’s securities proportionally. 

Moreover, you can also purchase the funds share(e.g., SPY, QQQ) in business hours if listed on the stock market(New York Stock Exchange). 

Like a stockholder, you will get the dividends, interests, and capital gains regularly when the stocks or bonds pay. Even if the shares of an index fund are not listed on the stock exchange, you still can buy the securities based on the last working day’s price.

How to weigh index funds

As different combination methods calculate market indexes, index fund managers have to adjust the portfolios regularly and match an index’s weighting according to changes. The calculation methods of index mainly consist of 3 widely used sorts:

  • Price-weight index: This index takes the prices of the securities it holds into consideration. Securities of higher prices have a higher weight in the index. Dow Jones Industrial Average(DJIA) is the price-weight index. As the components’ prices determine an index’s weight, managers have to adjust the portfolios’ pricing to match the index weight accordingly.
  • Market-cap weight index: Each security’s market capitalization determines the weight of the index. Standard & Poor’s 500 index(S&P500). An asset’s high market cap has more impacts on the index, so has a market-cap weighted index fund. Managers have to adjust the changes in market cap changes in line with the index.
  • Equal weight index: It consists of equal proportions of securities in the index. S&P equal weight index(EWI) is one of the indexes. Managers do not change their portfolios frequently as the weighting is the same no matter the prices and market capitalization changes.

To recap, more rebalancing of portfolios is necessary for price-weight indexes, and vice-versa, least is for equal weight indexes.

Is an index fund investing passive investments?

Yes, it is! The actively managed fund has a goal of outranking the index; therefore, managers have to find market opportunities and determine strategies to manage their portfolios like buying, selling, and even hedging. 

However, it may incur more risks and expenses. In the long term, the strategy may not outperform the passively managed ones.

What are the Advantages of Index Funds

  • Long Term Performance: According to SPIVA statistics and Reports(SPIVA), almost 70% OF US large-cap companies cannot beat S&P Dow Jones Indices over the past five years until the end of December 2019. Even only one-third of mid-cap companies beat Standard & Poor’s 500(S&P 500) in one year. 

If we look further, only 13% of actively managed funds outperform the S&P Midcap 400 growth index over the ten years, according to investor’s business dailies. Advocates argue that few people can beat benchmark indexes; most of the wins are probably due to costs and lucks. Index funds invest based on the market indexes; therefore, they can generate better returns.

  • Lower costs: Index funds incur fewer costs than actively managed funds: 

1. Operating costs: trading costs are less because fewer trading activities occur, research and analysis(R&D) are almost zero as the components of index funds are in line with indexes.

2. Taxes: taxes related to trading and capital gains are less than actively managed funds. 3. Administration cost: Actively managed funds hold a larger staff than index funds and consume more expenses. They charge 0.75% to 1% more than index funds typically.

  • Transparency: Index fund components are reflective of that of the benchmark index. Expense allocations are clear and straightforward, and investment strategies are passive by copying the index ones. It is easy to understand how index funds work and what the fees are all about. If a beginner or dummy is mindful of complicated investing, he will most likely like the mechanism of index fund investing.
  • Diversification: Most index funds invest in major US indexes. The Dow Jones Industrial Average(DJIA) indexes and Standard & Poor’s 500(S&P 500) cover mainly blue-chip companies and various economic sectors and are nearly representative of the US economy. If you invest in the indexes, you invest in almost all sorts of sectors of the economy. 

The benefits: by investing in cross-section investing, you can reduce the risks of investing in only one industry and one company. That means: if you only invest in one sector or one company like textile manufacturing, you may suffer the loss as to the decline of the apparel industry, etc. 

In other words, you may not lose your bets by only investing if it suffers from a loss like Enron or Worldcom. Diversification means more protection to the index fund investors, especially to the new investors.

What are the Disadvantages of Index Funds

  • Lack of flexibility: As the name implies, index funds cannot invest more than it allows beyond the securities specified. Investors may miss other opportunities for returns. 

Moreover, managers have little discretion to change the portfolio’s combination by mimicking the index, which may lead to a loss of chances of profiting from the proportions of climbing stocks. 

For example, Tesla(TSLA) was recently added to the Standard & Poor’s 500; what if the security had been added to the index one year earlier or managers could buy the stock at will without any restrictions. The consequence: the returns for the index fund might become a different one!

  • Rarely outperform the index: Index funds are designed to model a benchmark index, so the intention is not to exceed an index’s returns.

If the market crashes, managers of the index funds can do little to stop them except sticking to an index’s components. They cannot sell to prevent the loss and buy more than specified to increase profit if the market climbs again. 

Moreover, index fund investors earn fewer returns than an original index delivers after paying expenses. However moderate the costs (depends on individual funds), the returns from index funds are mildly smaller than the market, and may contradict what ambitious and young investors intend to do!

  • Tracking error: Except for the above restrictions, index fund performance may vary from one to one even though all invest in the same index. 

The performance of respective managers is primarily attributed to the benchmark called tracking error. Managers have their discretion as to when to invest and create different prices for a stock. Consequently, a large index fund has more advantages of getting a favorable price for a stock than a smaller one. 

According to the benchmark index, a fund manager with a large cash flow may have a hard time converting the cash position into stock positions. Finally, not every index fund has the same tax position. It may likely affect an index fund’s performance! The benchmark error for passive index fund managers is a plus and minus 0.5%.

  • Management differences: There are no clear regulations for “index fund.” As the term index fund becomes more popular, index fund companies have their interpretations on naming and investing in an index fund regarding expenses and even portfolio combinations. 

Some index funds may seek active investment strategies to achieve returns above the index. This may increase the risks and easily confuse investors, especially beginners, under the umbrella of the name “index fund.”

How Should I Choose an Index Fund?

  • Risk tolerance: According to Investopedia, risk tolerance is a measure of the extent of investment loss an investor is willing to put up in the process of investing. 

Before investing, a financial planner will give investors options on what they can endure if their holdings crash, e.g., 25% or more: 

1. Sell all the holdings

2. Sell part of the holdings

3. Hold

The first one is conservative, then moderate; the final, aggressive. Risk tolerance differs on age, income, and attitude. A young investor may have high-risk tolerance with market swings relative to an aged one because he believes there is enough time to recover the loss. 

A high-income earner may endure more risks because he can earn it back in the future. An aggressive investor is more likely to bear more loss than a conservative one.

  • Fees: Charge fees by index fund companies varies to some extent. The annual expense ratio generally is 0.09% for stock Index funds and 0.07% for bond index funds.

An investor should look at the expense in detail; it affects the returns in the future. As to more charges, the longer one invests in index funds, the compounding effects of fees on returns will grow larger.

  • Time horizon: No wealth is created without time! Investing horizon makes a significant impact on everything about returns. The more time we let investments grow, the more returns we accumulate. Therefore, a reasonable investing period should be set up beforehand!

An investor should talk to his financial advisor before making any decision as to his investing goals. Besides, a financial advisor should regularly review changes related to risk tolerance. Investors should have their portfolios reviewed every half a year at least.

  • Index fund operating strategies: An investor should review the index fund operating policies before investing in an index fund. As said, some funds may allow managers to lend securities or cash to increase profits. 

The practice seems to increase the returns but also raise the risks to investors as well. A conservative investor should avoid this kind of index fund with this trading policy.

5 ways to identify a good index fund

  • A good index is transparent: A good index should consist of 2 significant factors: 

1. The purpose of the index.For example, the Standard & Poor’s 500 index is designed to measure the US’s top 500 companies’ performance and a capitalization-weighted index. Of those, most market-cap companies have a major impact on the combination of the index.

2. It should have breadth. Russell 3000 index consists of 3000 publicly listed companies in the US and covers almost 98% of the publicly traded market. Therefore, whether new or experienced, investors should clearly understand the indexes they will invest.

  • There is minimal turnover: As an investor, Imagine you encounter an ever-changing index and are aware it frequently changes components. 

As a result, the manager has to frequently rebalance the portfolio in line with the changes and increase the administrative and trading costs. 

Furthermore, the credibility of the index may be in question due to this inconsistency. It may become difficult for investors to track and follow. A trustworthy and highly authoritative index should include a stable and steady combination of components.

  • The index is logical: Better know-how helps you make better decisions! 

Let’s take an example–the stocks in the Standard & Poor’s 500 index are selected based on eight criteria: market capitalization; liquidity; domicile status; public float; global industry classification and standard of the industries in the economy of the US; financial viability; length of public trading time and exchange. The index is calculated based on a market capitalization method. 

The calculation is open and logically understandable. You may suffer a considerable loss if you make a wrongful decision based on misinformation and unclear grounds offered by an index fund.

  • The index is relevant to the real world: Investing is all about “invest for growth.” Growth is for the economy, industry, and enterprises. 

Think if you intend to invest in MARS, you may not currently see the growth potential because a method for index calculation is hardly justified and unpracticable. However, you are to feel confident in investing in companies contributing to industry and economic growth. 

That said, a reliable index must comprise:1. productive companies for real growth for investors; and 2. long-term nature for wealth accumulation. Indexes like DJIA, S&P 500, and Russell 3000 meet the above criteria.

Are Index Funds A Good Investment?

Markets are full of unknown factors! Whether you are an experienced investor or a dummy beginner, you may sometimes be caught up by sudden unexpected events within. 

There are some occasions when you may have to react panicky or hilarious even though you think you are well prepared. These kinds of Irrational behaviors can dominate your mindset and cause major loss to your investments.

Index funds provide a platform for new or experienced investors to follow and benefit from the corporation’s growth. The advantages are:

  1. you don’t need special knowledge to participate in the game
  2. You can participate in a wide range of investment tools and diversify the risks\
  3. As most investors cannot beat the market, index fund investors will let investors gain the rewards handsomely if you choose to invest in index funds wisely( I will tell you later in the following).
  4. Due to its low cost, simple mechanism, and transparency, index funds are appropriate tools for general investors, especially investing beginners.
  5. Finally, they are ideal vehicles for long term investors planning for children’s education, retirement, traveling, raining days purposes.

If you have a long-term investment concept, you should consider the benefits index funds will bring. Good preparations are the first step towards your financial goals. 

Closing 

Various kinds of index funds can make you dizzy as you have to spend a lot of time combing through the racks standing inside the fund houses. So, information gathering is the first-go task. 

Financial intelligence sources like TV: Bloomberg, Reuters; financial newspaper, e.g., Wall Street Journal, Financial Times; online magazines like Investoralist; Barron’s. They provide information and analysis relating to the index funds industry. 

Besides, Investoralist also provides in-depth knowledge and comparisons, so investing dummies and experienced investors should benefit before any happy investing!

How To Buy Bonds: The Ultimate Beginner’s Guide

Buy Bonds Online

Bonds are one of two primary and popular investment tools besides stocks for wealth accumulation. The bond investment gives a stable income – regular fixed income and coupon interest over a certain period. Moreover, it is a low volatile kind of investment as quality bonds have fewer price fluctuations than stocks.

If you think investing in bonds like investing in stocks: buy a stock, fold your handstand, sit and wait for the price to appreciate, you may make some serious mistakes! Unlike stocks, bond investing requires entirely another approach when you plan to include it in your portfolio.

What Are Bonds?

A bond is a promise to repay the principal and interest owed to bondholders. It is a loan made to a government agency, e.g., treasury department, a municipal government, or a commercial corporation, in return for interest payments and principal at the end of a loan period. 

Let’s say if you invest in savings bonds or buy Treasury bonds both issued by US Government, you lend money to the government for use and receive interest regularly as and principal subsequently. Such financial institutions like insurance companies or corporations like General Electric, Ford Motors may issue short to long-term bonds for operating and cash flows. They offer bond investors good opportunities.

Buying Bonds: Where to Begin?

Unlike stock investing, most bonds are denominated in $1,000 increments and not listed in public markets. An investor may have to buy over-the-counter and find it no more convenient than the open market. It may increase the difficulties in building their investment or retirement portfolios like 401k plans. However, there are several ways to access and make bond buying easy:

  • Online brokerages and traditional brokers

Except for traditional brokers, now you can buy bonds online through online brokerages; most major brokerages offer online access to investors to buy individual bonds. A brokerage will provide you with two kinds of quotes: an offer from a seller and an initial offering from an investment bank. 

An investor may buy bonds at a discount off face value from investment banks. The other comes from existing bondholders who intend to sell. If a buyer accepts the bid price, he can buy it through the broker. Investors can all buy bonds online.

A company or government agency may issue multiple kinds of bonds available in the market. You should distinguish the differences among bonds, and I will suggest you consult your financial consultant before dropping money on one!

  • Exchange-traded funds(ETF)

It is a kind of pooled fund investment and belongs to one member of the mutual funds family. As the name implies, it buys a lot of bonds in his portfolio. When you subscribe to a unit, you own a proportion of all the bonds held in a fund and get all the dividends and interest payments.

You will have several advantages in investing in exchange-traded funds:

  1. A bond fund diversifies and reduces risks by owning different kinds of bonds but still provides a stable income stream to fund holders.
  2. One of the benefits of investing in ETF is you can buy a large denomination of bonds with a small amount of money.
  • Direct investment in the US Government

Another attractive way for investors to buy bonds online is directly investing in US treasury securities. You do not need to pay commission or expenses for the government. Using TreasuryDirect makes investors zero-cost and easy in portfolio building.

What to Watch for When You Buy Bonds?

Bond investing is a do-your-homework job. You should do it in a step by step process. Three points to consider if you plan to buy bonds:

   1. Can the borrower pay his bonds?

The most important question you have to ask yourself is the creditworthiness of the bond issuer. It is all about the issuer’s commitments and ability to pay on time. Three principal three rating agencies are responsible for assessing a company’s pros and cons. 

A credit rating will be assigned to a bond once an agency completes the assessment. An investment grade “AAA” is a statement a bond can give an investor the maximum quality assurance of its financial strength and commitments. But you have to note that the “investment grade” bond pays the least interest, like US treasury bonds.

There are three major popular bond types in the market:

  • Corporate bonds

As a rule of thumb, a quick way to see if a company can pay its debt is to look at its past payment history. They provide a reliable reference to how it is willing to pay in the future. 

A company’s financial statements are an excellent start to track its payment history. You can access the vast information through the US Securities and Exchange Commission website or the company’s site as well.

Another point to note is you can evaluate a company’s ability to pay the debt. By examining the financial statements, you can use a company’s operating income (a more reliable indicator to assess its financial strength), divided by interest expense, to look up a figure. You will find out an average number by calculating over 5 to 10 years (combine all those figures, then divided by years).

What do the numbers mean?

  1. 4 or higher: A company has the most robust financial strength to pay up the debt.
  2. 2.5 to 4: It is at the lower end of financial commitment and ability.
  3. 1 to 2.5: A company may have some capability to repay a debt.
  4. Below 1: A company may find it difficult to pay.

It is not a golden rule but, combined with analysis of relevant financial data, gives a clear picture of its fundamentals and outlook.

  • Government bonds

Government bonds are different from corporate bonds because they are commercial entities and don’t need to prove their capability. However, the bonds they issue, especially the federal government, are rated “AAA” as the safest one globally. The federal government’s bonds pay the least interest among all bonds. People view the interest rates as “the risk-free rate.”

  • Municipal bonds

The bonds issued by municipals or local governments are entirely different pictures from the federal government. They have individual financial and fiscal policies, and you should look at their delinquency and default history before making any decisions. Bond investors should refer to the Electronic Municipal Market Access(EMMA) site for local government bonds information. They may reveal more about the current and past rating history.

   2. When is the right time to buy bonds?

The general trend: bond prices go in a countercyclical manner. When the interest rates are up(mostly the economy is upping), bond prices will go down. However, when the interest rates go down(the economy cools down), the prices will go up.

The recent trends of interest rates since the 1980s are going down though we see some small ups in the midst. Therefore, it is not wise to time the market if you intend to include bonds as your long-term savings or retirement plans.

Some investors use the “laddering” strategy to protect their investments: reinvesting the proceeds from the maturing bonds into new bonds. It may reduce the interest rate risk but possibly at the expense of lower yield. You should consult a financial advisor before doing it.

  3. Which bonds are right for my portfolio?

As said earlier, there are all kinds of bonds for investors, so how should we choose? It depends on an investor’s criteria like risk tolerance, tax brackets, and income requirements. Let’s see the characteristics of the major types of bonds:

  • Federal Government Bonds: They are investment-grade bonds and sell for discounts to investors. On expiration, bondholders redeem the bonds at face value.
  • Municipal bonds: Issued by local and state governments, they are tax-exempt bonds and best suitable for high tax income earners.
  • Investment-grade corporate bonds: The bonds are quality bonds of “AAA” ratings. The creditworthiness is excellent. They pay more interest than the treasury bonds.
  • High-yield bonds: The interest paid is much higher than other grades of bonds, but investors should be aware of the default’s risk.

A well-balanced portfolio of bonds should cover all types of bonds. It comprises of 

different maturities, so it reduces interest rate risk and principal repayment risk. You should also adopt the “laddering strategies” to maintain the proportions of bond allocations.

You may notice investing in bonds requires an initial large sum of capital for the $1,000 increments as necessary. Investors may find it challenging to keep a balanced portfolio as large capital outlays are required for multiple bond purchases.

Exchange-traded funds of all types of fixed income securities or bonds are the right way out! When you hold a stake in them, you own a part of all the bonds they hold. Besides, you should choose low-cost funds as it may reduce your return.            

What Do You Need to Know Before Buying Bonds?

Doing homework is a requisite before you throw your money into it. Take the following steps and see what you will have from them:

  • Always do your research.

Bond investing is, in fact, a loan business. A debtor is committed to paying back money owed to a creditor at a specified time. As a creditor, you have to know the terms and conditions of a loan contract before sending the money to a borrowing company’s account.

As mentioned earlier, you should consider interest rates, maturities, default risk, and, lastly, the creditworthiness of your debtor.

  • Stay away from the junk bonds!

If you are eyeing for high yields offered by junk bonds, you will likely make serious mistakes. I am talking about a long-term investment! Imagine how serious it might be when your savings or retirement account is holding a portion of the junk fund. They may spoil your dreams at any time when they default.

  • Look into the cost of your investment.

You are now fully aware bond investing is a long-term investment. Bond’s interest provides a regular and stable income stream to bondholders. But the cost is a primary factor in investing decisions. You should choose the lowest-cost bond providers. TreasuryDirect offers zero commission and is the best way to buy treasury bonds.

However, investors may be frustrated by the large capital outlay of bond denominations(mostly in $1,000 increments). Bond funds provide investors with access to an extensive array of bonds with a moderate amount of money. But you should clarify the cost of investing in funds. Don’t let cost outrun your investment returns!

Conclusion

You have nowadays more ways of investing in bonds:

  1. Online brokerages,
  2. Bonds funds,
  3. Invest through TreasuryDirect.

While it is easier than ever to invest, you should do thorough research and look away from junk bonds and high-cost bond investments. It is not necessary to time the market if you hold for long-term. 

Of those mentioned, research is the most time-consuming task among others. A timely and trustworthy analysis is essential to your judgment. Investoralist provides relevant information regarding bond investing.

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