The 3 Best Vanguard Mutual Funds for Your Roth IRA

Vanguard offers mutual funds that are suitable for holding in a Roth individual retirement account (IRA). Vanguard has funds with 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 his retirement, his risk tolerance and his financial situation.

Vanguard has some of the lowest expense ratios in the industry. These low expense ratios can impact the rate of return for mutual fund investments over time. Vanguard is a pioneer in the index fund space; it created the first index mutual fund in 1976.

Vanguard Total Bond Market Index Fund

The Vanguard Total Bond Market Index Fund 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. It has an annual dividend yield of 2.03% as of November 2015.

The Vanguard Total Bond Market Index 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 7,700 bonds with around $147 billion in assets under management (AUM) as of November 2015. Around 64% 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 the corporate bonds are the finance sector with a 8.3% portfolio weighting and the industrial sector with a 15.9% weighting.

The average effective maturity of the bonds in the fund is 7.9 years. The average duration of the bonds is 5.7 years. The minimum investment for the fund is $3,000. The fund has an expense ratio of 0.2%, which is very low. Vanguard also has the same fund available as an exchange-traded fund (ETF)

Vanguard Total Stock Market Index Fund

The Vanguard Total Stock Market Index Fund 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, the stock markets have generally gone up over time.

The fund's holdings include small-, mid- and large-cap stocks. The fund is extremely well diversified, with 3,809 holdings as of September 2015. It pays a yield of 1.96%. The fund has over $370 billion in assets under management (AUM)

In terms of a sector breakdown, the financials sector has the largest weighting in the Vanguard Total Stock Market Index Fund at 19.5%. This is followed by the consumer services sector, with a 14.1% weighting. In third is the health care sector, with a 13.7% weighting. The top 10 individual holdings comprise 14.5% of the total net assets, with Apple as the top holding.

Vanguard REIT Index Fund

The Vanguard REIT Index Fund 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 from the stock market.

The fund has 145 stocks and net assets of $48 billion as of September 2015. The unadjusted effective yield is 3.9%, which may not account for how the REITs classify their distributions for tax purposes. The largest portfolio weighting is residential REITs with 17.3%. This is followed by office REITs at 13.6%, with health care REITs in third at 12.8%.