Vanguard offers several mutual funds that are suitable for holding in a Roth individual retirement account (IRA). These funds can be purchased through most online brokers. The funds consist of different asset types, including equities, bonds, and real estate investment trusts (REITs).

The appropriate asset allocation for a particular investor's Roth IRA is based on factors that include the number of years until retirement, risk tolerance, and financial situation.

The Vanguard Total Bond Market Index Fund (VBTLX)

The Vanguard Total Bond Market Index Fund (VBTLX) holds high-quality, investment-grade bonds from the United States. The fund is designed to provide exposure to a wide range of the U.S. bond market and has an annual dividend yield of 2.16% as of April 2021.

The fund is intended to serve as a core bond holding for investors. Bonds generally have low volatility and provide a steady supply of interest payments to the investor. Taxes on the interest payments are deferred in a Roth IRA account, making it an ideal place to hold such investments.

The fund holds over 18,500 securities with $73.3 billion in assets under management (AUM) as of October 2018. Around 46.5% of the bonds are issued by the U.S. government, including bonds across a range of maturities. The remaining bonds are corporate fixed-income instruments with different credit ratings. The main sectors represented by corporate bonds are the finance sector and the industrial sector.

The average effective maturity of the bonds in the fund is 8.5 years. The average duration of the bonds is 6.6 years. The minimum investment for the fund is $3,000. The fund has an expense ratio of 0.05%, which is very low.

The Vanguard Total Stock Market Index Fund (VTSAX)

The Vanguard Total Stock Market Index Fund (VTSAX) provides exposure to the entire U.S. equity market. Investors who are looking to create wealth through price appreciation should consider a broad-based equities fund such as the Vanguard Total Stock Market Index Fund. Although equities have higher volatility than bonds, they return more to the investor over a longer period of time.

The fund’s holdings include small-, mid-, and large-cap stocks. The fund is extremely well-diversified, with 3,745 holdings (as of April 2021). It pays a yield of 1.36%. The fund has over $238 billion in assets under management (AUM) and charges a very low 0.04% expense ratio.

In terms of a sector breakdown, the technology sector has the largest weighting in the fund at 22.9%. This is followed by the finance sector, with a 14% weighting. In third is the healthcare sector, with a 13.7% weighting. The top 10 individual holdings comprise 21% of the total net assets, with Microsoft as the top holding.

The Vanguard REIT Index Fund (VGSLX)

The Vanguard REIT Index Fund (VGSLX) provides a way for an investor to gain exposure to real estate in an IRA. The fund invests in REITs that buy office buildings, hotels, and other properties. This fund may provide a good method for portfolio diversification, as real estate often moves separately—but not necessarily divergently—from the stock market.

The fund holds 176 securities, with net assets of $37.9 billion (as of April 2021) and an expense ratio of 0.12%. The unadjusted effective yield is 3.5%, which may not account for how the REITs classify their distributions for tax purposes. The largest portfolio weighting is toward specialized REITs with 31.5%. This is followed by retail REITs at 14.8%, with residential REITs following at 13.5%.

The Bottom Line

Vanguard is a pioneer in the index fund space, having created the first index mutual fund in 1976. The group offers some of the lowest expense ratios in the industry, which can be utilized to positively impact the rate of return for mutual-fund investments over time. Many investor portfolios carry at least one, if not all three, of the mutual funds mentioned.