Roth IRA Fund Options from Wealthfront

VTI and BND are a good place to start

Wealthfront Corp. is a financial services company that offers wealth management and investment advisory services. It operates a robo-advisor that uses algorithms to provide clients with customized investment management, financial planning, and a range of other brokerage products and services. The company offers a broad range of exchange-traded funds (ETFs) managed by other companies.

Wealthfront, which was founded in 2008, operates through three subsidiaries: Wealthfront Software LLC, Wealthfront Advisers LLC, and Wealthfront Brokerage LLC. The company has more than $27 billion in assets under management (AUM).

Wealthfront operates as a discount broker. The company’s software is focused on offering investment advice and customizes trades to each specific client, similar to a full-service broker. But Wealthfront’s services are limited compared to full-service brokers. For example, it does not provide individual tax advice. And there are no human advisors with whom investors can discuss their portfolios. Wealthfront’s services come at a low annual advisory fee of 0.25% and zero account or trading fees.

On Jan. 26, 2022, Swiss multinational investment bank UBS Group AG (UBSG) agreed to acquire Wealthfront in an all-cash transaction valued at $1.4 billion. The transaction is expected to close sometime during the second half of 2022. Wealthfront said that UBS would let the company continue to operate as a stand-alone business with its own brand.

Investors in the United States have access to several tax-advantaged saving plans, 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 But unlike a traditional IRA, where withdrawn funds are taxed, a Roth IRA allows investors to withdraw funds tax free.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

  • Wealthfront was founded in 2008, offers a range of exchange-traded funds (ETFs) managed by other companies, and has more than $27 billion in assets under management (AUM).
  • 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.
  • The Vanguard Total Stock Market ETF (VTI) and the Vanguard Total Bond Market ETF (BND) can serve as good starting points when looking for Roth IRA investments from Wealthfront.

Wealthfront does not offer any of its own proprietary funds, as mentioned above, instead providing a broad range of ETFs issued by other companies from which investors can choose. Below, we look at one broad-based stock fund and one broad-based bond fund available through Wealthfront. Both funds are index funds and should thus perform similarly to other funds tracking the same index. Thus, the main reason for choosing each of these two funds is that they are the cheapest out of all of the stock and bond funds offered by Wealthfront.

Fund numbers below are as of March 26, 2022, except where indicated.

Vanguard Total Stock Market ETF (VTI)

  • Expense Ratio: 0.03% (as of April 29, 2021)
  • Assets Under Management: $290.8 billion
  • One-Year Trailing Total Return: 11.83%
  • 12-Month Trailing (TTM) Yield: 1.33%
  • Inception Date: May 24, 2001

VTI is an ETF that aims to track the performance of the CRSP U.S. Total Market Index, an index composed of approximately 4,000 stocks across the market capitalization spectrum and that represents nearly 100% of the U.S. investable equity market. The market-cap-weighted fund provides broad, diversified exposure to the U.S. equity market.

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

As of Feb. 28, 2022, the ETF had 4,070 holdings. They are composed as follows: 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 within the fund is $510.6 billion.

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.

Vanguard Total Bond Market ETF (BND)

  • Expense Ratio: 0.035% (as of April 29, 2021)
  • Assets Under Management: $80.1 billion
  • One-Year Trailing Total Return: -2.63%
  • 12-Month Trailing (TTM) Yield: 1.97%
  • Inception Date: April 3, 2007

BND is a passively managed ETF that seeks to track the performance of the Bloomberg U.S. Aggregate Float Adjusted Index, a market-weighted index used as a benchmark representing the broad, investment-grade U.S. bond market. The fund provides broad exposure to taxable U.S. dollar-denominated bonds that are of high credit quality.

BND’s sole portfolio manager is Joshua C. Barrickman, who has advised the fund since 2013.

As of Feb. 28, 2022, the ETF had 10,127 holdings. Of these, 45.31% are U.S. Treasury or agency bonds, 20.13% are government mortgage-backed securities (MBS), 16.57% are bonds issued by industrial firms, 8.59% are issued by financial companies, 3.69% are issued by foreign entities, 2.25% are issued by utilities, 2.22% are commercial MBS, 0.86% are other debt securities, and 0.39% are asset-backed securities (ABS). All of the fund’s holdings are considered investment grade, with a credit rating of BBB or higher.

A broad-based bond or fixed-income fund like BND is generally less risky than an equity fund. 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 bond fund and a broad-based equity fund provides diversification. It is an approach that tends to maximize returns while minimizing risks.

Does Wealthfront have a Roth individual retirement account (Roth IRA)?

Yes. Investors can open Roth individual retirement accounts (Roth IRAs) with Wealthfront, as well as traditional IRAs and Simplified Employee Pension (SEP) IRAs. Wealthfront even makes it possible for investors to roll over their 401(k)s into an IRA. However, to qualify for a Roth IRA, investors must meet certain income requirements as laid out by the Internal Revenue Service (IRS).

Is a Wealthfront Roth IRA safe?

All investments with Wealthfront, including Roth IRAs, are insured by the Securities Investor Protection Corp. (SIPC). This means that up to $500,000 (including $250,000 in cash claims) of an investor’s assets are protected against the failure of Wealthfront. However, SIPC insurance does not protect against declines in the market value of the securities in investors’ accounts. Additionally, Wealthfront employs an internal security team that works to protect its investors’ data. The company’s policies, procedures, and processes are also audited annually by a third party.

Can I withdraw from my Roth IRA at Wealthfront?

Unlike contributions to traditional IRAs, which are tax deductible, contributions to a Roth IRA (including those at Wealthfront) can be withdrawn tax free at any time because the contributions have already been taxed. While the contributions made into a Roth IRA are allowed to grow tax free within the account, a withdrawal of investment earnings in excess of contributions and that does not meet the requirements for a qualified distribution may be subject to taxes and penalties.

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.

Article Sources
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