Smart ways to invest your tax return.
The average federal tax refund is about $2,800, although some taxpayers may receive slightly less this year under the new tax law. With a few thousand dollars, investors can opt for mutual funds or exchange-traded funds because of the diversification these funds provide, says Rich Messina, senior vice president of investment product management of E-Trade, a New York-based brokerage firm. “ETFs likely hold more appeal when you’re working with a relatively small chunk of change.” Here are seven stocks or ETFs to invest your tax refund in for the long term.
SPDR S&P 500 ETF (ticker: SPY)
The SPDR S&P 500 ETF seeks to replicate the performance of the S&P 500 index, a major benchmark for U.S. large-cap stocks. It owns shares of more than 500 companies and the fund is typically among the largest ETFs in terms of assets and daily trading volume. This fund’s top holdings include Microsoft Corp. (MSFT), Apple (AAPL), Amazon.com (AMZN) and Berkshire Hathaway Class B (BRK/B), to name a few. The fund’s expense ratio is 0.09 percent and can serve as a core holding for investors looking to gain exposure to large-cap U.S. equities as part of a balanced portfolio. “Novice investors may look to broad index ETFs to serve as the foundation for their portfolios,” Messina says.
iShares Russell 1000 Growth ETF (IWF)
IWF tracks the investment results of the Russell 1000 Growth Index, which measures the performance of large- and mid-capitalization growth sectors of the U.S. equity market. This fund’s top holdings include tech behemoths Apple and Microsoft as well as consumer discretionary companies like Amazon and Home Depot (HD). Among the U.S. News Best ETFs for Large Growth, IWF is ranked at No. 11 and its year-to-date return is 12.3 percent.
Consumer Discretionary Select Sector SPDR ETF (XLY)
XLY is a good option for more experienced investors looking to diversify their portfolios, since sector ETFs can bolster returns or mitigate risks, Messina says. This ETF seeks investment results that correspond to the price and yield performance of publicly traded companies in the Consumer Discretionary Select Sector Index. The fund invests at least 95 percent of its total assets in the securities comprising this index. The index includes securities of companies from a few of the following industries: retail, hotels, restaurants and leisure.
Vanguard Real Estate ETF (VNQ)
Tracking the performance of the MSCI US Investable Market Real Estate 25/50 Index, the Vanguard Real Estate ETF seeks to provide a high level of income and moderate long-term capital appreciation from real estate investment trusts, known as REITs, and other real estate investments. The fund attempts to track the index by investing all, or substantially all, of its assets either directly or indirectly through a wholly owned subsidiary. Some of VNQ’s top holdings include American Tower Corp. (AMT), Simon Property Group (SPG) and Crown Castle International (CCI).
Vanguard Utilities ETF (VPU)
VPU employs an indexing investment approach designed to track the performance of the MSCI USA Utilities IMI 25/50, an index made up of stocks of large, mid-size, and small U.S. companies within the utilities sector. This ETF holds a few well-known utility companies, such as NextEra Energy (NEE), Duke Energy Corp. (DUK) and Dominion Energy (D). Recently, a number of institutional investors, such as Gamble Jones Investment Counsel in California, have increased their position on VPU.
Exxon Mobil Corp. (XOM)
The well-known oil and gas company manufactures petroleum products as well as transports and sells crude oil, natural gas and petroleum products. The company’s upstream operation explores for and develops oil and natural gas projects on six continents. Exxon currently yields 4.3 percent and has been solid for decades, says Ron McCoy, CEO of Freedom Capital Advisors in Clermont, Florida. An investor can also reinvest the dividends through a dividend reinvestment plan instead of letting dividends accumulate in cash or a money market account; a dividend reinvestment plan automatically uses the dividends earned to purchase more shares of an investment through a stock transfer company like Computershare.
ARK Innovation ETF (ARKK)
An actively-managed ETF that invests at least 65 percent of its assets in domestic and foreign equity securities, ARKK’s theme is one centered around innovation for long-term growth. ARK Innovation Fund’s top holdings include Tesla (TSLA), Stratasys Ltd. (SSYS) and Square (SQ), with the majority of its holdings in the tech, health care and consumer cyclical sectors. “The ARK Innovation Fund is a selection of the best ideas from each of the other ARK ETFs,” says C.J. Brott, founder of Capital Ideas, a Dallas-based wealth advisory firm. “This way you get diversified across each of their areas of expertise.”
7 investments to make with a tax refund.
To recap, consider these investments to buy and hold with your tax refund:
- SPDR S&P 500 ETF Trust (SPY)
- iShares Russell 1000 Growth ETF (IWF)
- Consumer Discretionary Select Sector SPDR ETF (XLY)
- Vanguard Real Estate ETF (VNQ)
- Vanguard Utilities ETF (VPU)
- Exxon Mobil Corp. (XOM)
- ARK Innovation ETF (ARKK)