Roth IRA Fund Options from Interactive Brokers

VTI and BKAG are simple, strong foundations

Interactive Brokers Group Inc. (IBKR) is an automated global electronic broker providing execution, clearance, and settlement services for institutional and individual customers. The company uses proprietary technology to allow customers to monitor and trade in 33 countries around the world simultaneously, at a low cost, from a single trading account.

Interactive Brokers’ roots go back to 1978, and the company was incorporated as a U.S. broker-dealer in 1993. The company has grown to have about $374 billion of client equity and is a full-service brokerage.

Interactive Brokers makes available every exchange-traded fund (ETF) that is publicly traded on a major exchange, as well as more than 45,000 mutual funds. The company does not have its own family of funds. Additionally, Interactive Brokers provides access to stocks, options, futures, foreign exchange instruments, bonds, metals, and cryptocurrencies.

Investors in the United States have access to several tax-advantaged saving plans offered by a broad range of other financial services companies, including 401(k)s, individual retirement accounts (IRAs), and Roth IRAs. The main difference between a Roth IRA and a traditional IRA is that the former is funded with after-tax dollars. This means that contributions to Roth IRAs are not tax deductible, where they are with traditional IRAs. But unlike a traditional IRA, where withdrawn funds are taxed, a Roth IRA allows investors to withdraw funds tax free.

Key Takeaways

  • Interactive Brokers, whose origins go back to 1978, offers more than 45,000 mutual funds and has about $374 billion of client equity.
  • When making a retirement account, a broad stock fund and a broad bond fund provide a good foundation, either as the entire basis for investing or to build upon with more complex investments.
  • Roth individual retirement accounts (Roth IRAs) allow you to avoid paying taxes on investment returns by investing after-tax income now.
  • VTI and BKAG can serve as good starting points when looking for Roth IRA investments from Interactive Brokers.

All data in the bullet point lists for each fund below are as of March 31, 2022, unless otherwise indicated.

Vanguard Total Stock Market ETF (VTI)

VTI is an ETF that aims to track the performance of the CRSP U.S. Total Market Index, an index composed of thousands of stocks across the market capitalization spectrum and that represents approximately 100% of the U.S. investable equity market. The fund provides broad, diversified exposure to the U.S. equity market.

VTI is managed by Gerard C. O’Reilly and Walter Nejman. O’Reilly has advised the fund since 2001 and Nejman since 2016.

Of the ETF’s 4,070 holdings as of Feb. 28, 2022, 66.4% are large-cap stocks, 3.3% are somewhere between midcap and large cap, 15.3% are midcap, 6.6% are between small cap and midcap, and 8.4% are small cap. The average market cap for each stock in the fund is $510.6 billion.

VTI has the widest range of exposure to stocks of various market caps compared to similar broad-based ETFs at its price point. A single broad stock fund is normally sufficient for most investors looking to build a long-term portfolio for retirement.

A total stock market fund, like VTI, is preferable to an S&P 500 index fund because it offers greater diversification by providing exposure to small-cap and midcap stocks in addition to large caps. The iShares Core S&P Total U.S. Stock Market ETF (ITOT) and the Schwab U.S. Broad Market ETF (SCHB) are also inexpensive alternatives. Investors who want to invest in a specific small-cap or midcap fund to complement a fund tracking the S&P 500 index might consider these large-cap ETFs: the iShares Core S&P 500 ETF (IVV), the Vanguard S&P 500 ETF (VOO), or the SPDR Portfolio S&P 500 ETF (SPLG), all of which are large-cap funds.

A broad-based equity fund like VTI carries a certain degree of risk, but it also provides investors with fairly strong growth opportunities. For many investors, this ETF may act as the foundation of a well-diversified investment portfolio. However, for those with a very low risk tolerance or who are approaching retirement, a more income-oriented portfolio may be a better option.

BNY Mellon Core Bond ETF (BKAG)

  • Expense Ratio: 0.00%
  • Assets Under Management: $285.3 million
  • One-Year Trailing Total Return: -2.34%
  • 12-Month Trailing (TTM) Yield: 1.61%
  • Inception Date: April 22, 2020

BKAG is a passively managed ETF that aims to track the performance of the Bloomberg Barclays U.S. Aggregate Total Return Index, a broad-based benchmark that gauges the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. The fund provides investors with broad exposure to the overall U.S. bond market.

BKAG has a 0 percent expense ratio. It is managed by Nancy G. Rogers and Gregory A. Lee, both of whom have advised the fund for two years.

Of the fund’s 2,112 holdings as of Feb. 28, 2022, 40.3% are Treasurys and 27.8% are agency fixed-rate bonds. The remaining roughly 32% of holdings are bonds or other debt securities issued by entities operating in market sectors including banking, consumer noncyclical, communications, and technology.

Broad-based bond or fixed-income funds are generally less risky than equity funds. However, bond funds don’t provide the same growth potential, which means generally lower returns. They can be useful tools both for risk-averse investors and as part of a portfolio diversification strategy. Consistent with modern portfolio theory, risk-averse investors will find that investing in both a broad-based bond fund and a broad-based equity fund provides diversification. It is an approach that tends to maximize returns while minimizing risks.

Traditional wisdom suggests that that the precise mix of stocks and bonds in a long-term portfolio should follow the 60/40 rule—60% stocks and 40% bonds—and that the proportion of stocks to bonds should shrink as the investor ages. But conventional wisdom has changed, and many financial advisors and prominent investors, including Warren Buffett, now recommend that holding a higher percentage of stocks throughout an investor’s career can greatly enhance potential returns while only marginally increasing the risks. Investors should always consider their own financial needs and appetite for risk before making any investment decision.

Is there a fee to open an individual retirement account (IRA) with Interactive Brokers?

There are no custodian or termination fees associated with any individual retirement accounts (IRAs) provided by Interactive Brokers.

Can I move my IRA to Interactive Brokers?

Yes. It’s possible to move an IRA from another brokerage or service to Interactive Brokers. This process is known as a rollover. Rollovers can typically be done without a tax penalty. If the originating account is a Roth IRA, then the new account also must be a Roth IRA.

Can you trade options in an Interactive Brokers Roth IRA?

Yes. By definition, IRAs are allowed to carry futures and option contracts. IRAs may not carry short stock positions and may not hold a debit cash balance.

The Bottom Line

A Roth IRA offers investors certain tax advantages. Roth IRAs are unique in that they are funded with after-tax dollars and are not taxed when the funds are withdrawn at a later date. In short, funds invested in a Roth IRA can grow tax free. After opening a Roth IRA, the types of investments chosen will depend on the individual investor’s risk tolerance and how much time and energy they have to research various investments.

For investors with little time and energy, one option is to go with a few large and diversified funds, allocating part of their money to a broad-based stock fund and another part to a broad-based bond fund. These large, diversified funds also may create a solid foundation for many investors who do have the extra time and energy to evaluate other, sometimes riskier, investment options involving investments in individual companies or specific niches of the market, such as small-cap stocks.

Article Sources

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  1. Interactive Brokers Group. “About the Interactive Brokers Group.”

  2. Interactive Brokers Group, via U.S. Securities and Exchange Commission. “Form 10-K for the Year Ended December 31, 2021.”

  3. Interactive Brokers Group. “Stocks/ETFs.”

  4. Interactive Brokers Group. “Mutual Funds.”

  5. Internal Revenue Service. “Traditional and Roth IRAs.”

  6. Vanguard Institutional. “VTI: Total Stock Market ETF.”

  7. Morningstar. “Vanguard Total Stock Market ETF: VTI: Quote.”

  8. Center for Research in Security Prices (CRSP). “CRSP U.S. Total Market Index.”

  9. BNY Mellon Investment Management. “BNY Mellon Core Bond ETF (BKAG).”

  10. Morningstar. “BNY Mellon Core Bond ETF: BKAG: Quote.”

  11. Bloomberg Barclays Indices. “US Aggregate Index,” Page 1.

  12. Berkshire Hathaway. “2013 Letter to Shareholders,” Page 20 (Page 19 of PDF).

  13. Interactive Brokers Group. “Is There a Fee for Opening an IRA Account?

  14. Internal Revenue Service. “Rollovers of Retirement Plan and IRA Distributions.”

  15. Internal Revenue Service. “Rollover Chart.”

  16. Interactive Brokers Group. “IRA Account Information: Funding Your IRA.”

  17. Interactive Brokers Group. “Trading on Margin in an IRA Account.”

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