Health savings accounts are advantageous.
If you have an HSA, you likely pay less for out-of-pocket health care expenses since your contributions aren’t taxed. Since HSAs also serve as individual retirement accounts, they are a great way to increase your retirement savings. Any unused funds roll over each year, and you can tap into the money for nonmedical expenses after age 65. HSAs offer a trifecta of benefits: tax-deductible contributions, tax-deferred growth on the investments and tax-free distributions for qualifying medical expenses, says Tim Gilligan, a financial advisor at Wick Capital Partners. “Health care savings accounts are one of the more underappreciated and underutilized savings vehicles,” he says. Here are six exchange-traded or mutual funds that you should consider adding to your HSA.
Vanguard Ultra-Short Bond ETF (ticker: VUSB)
The Vanguard Ultra-Short Bond ETF is a good option for investors who plan on frequently using their HSAs for medical expenses. The ETF seeks to provide current income while preserving principal, says Evan Kulak, co-founder of Polaris Portfolios, a Chicago-based financial planning firm. The ETF invests in a diversified portfolio of government and corporate bonds that can provide liquidity and competitive interest rates. The majority of the bonds have less than a two-year maturity date. The fund has a 30-day SEC yield of 0.39% and offers a low expense ratio of 0.1% — similar to other Vanguard ETFs. “Medical expenses are often unexpected and unforeseen,” he says. “This makes it important to have a portion of your HSA invested in a fund that provides liquidity and capital preservation.”
Vanguard Total World Stock ETF (VT)
The Vanguard Total World Stock ETF invests in U.S. and international stocks and provides diversification at a low and attractive expense ratio. This ETF is a good starting point for investors since the ETF owns more than 9,000 stocks with an expense ratio of 0.08%, Gilligan says. The one-year return is 32.1%, and the three-year return is 14.9%. Investing in a less volatile ETF or stock can be critical in case you need to tap into the HSA for an unexpected medical expense, he says. “To that end, we emphasize low costs and diversification across asset classes when selecting the investments.”
iShares Core S&P Total U.S. Stock Market ETF (ITOT)
The iShares Core S&P Total U.S. Stock Market ETF is broadly diversified and offers exposure to the entire U.S. equities market, including large-, mid- and small-cap stocks with a low expense ratio of 0.03%. The one-year return is 36.5%, while the three-year return is 18.2%, nearly mirroring the ETF’s benchmark index. This ETF is not only inexpensive, it is also highly liquid, which can be beneficial for an investor who might need to use the funds from their HSA, Gilligan says.
Vanguard Balanced Index Fund (VBIAX)
The Vanguard Balanced Index Fund also provides diversification and lowers the amount of risk for investors since it invests in both stocks and bonds, says Stuart Michelson, a finance professor at Stetson University. The fund’s one-year return is 20.9%, while the three-year return is 13.5% with an expense ratio of 0.07%. The fund invests 60% in stocks and 40% in bonds by tracking two indexes that are broad barometers for the U.S. equity and taxable bond markets. Investors who want less volatility than an all-stock fund could opt for this one since it provides both growth and income. This fund could serve as a core holding in an HSA.
Vanguard Mid-Cap Index Fund (VIMAX)
The Vanguard Mid-Cap Index Fund provides the potential for more growth opportunities. Midcap stocks often generate higher rates of return compared with large-cap companies since they do not grow as quickly. The one-year return is 38.8%, while the three-year return is 16.4% with an expense ratio of 0.05%. The initial minimum investment is $3,000, but an ETF version where an investor can start by purchasing only one share is also available through the Vanguard Mid-Cap ETF (VO). The fund provides higher returns than a balanced fund and is a good way to add diversification to a portfolio, Michelson says.
Invesco NASDAQ 100 ETF (QQQM)
The Invesco NASDAQ 100 ETF can be a good addition to an HSA after investors have established a “very solid core portfolio of low cost” and broadly diversified index funds or ETFs, Gilligan says. “Investors can consider adding a 5% to 10% allocation,” he says. “The allocation should be a smaller slice of an already well-diversified portfolio.” QQQM is a cheaper version of the popular Invesco QQQ Trust (QQQ). Both funds track the Nasdaq 100 and include the largest 100 domestic and international nonfinancial companies listed on the index. QQQ is structured as a trust with an expense ratio of 0.2% and QQQM as a traditional ETF at 0.15%.
Consider these funds for your HSA:
— Vanguard Ultra-Short Bond ETF (VUSB)
— Vanguard Total World Stock ETF (VT)
— iShares Core S&P Total U.S. Stock Market ETF (ITOT)
— Vanguard Balanced Index Fund (VBIAX)
— Vanguard Mid-Cap Index Fund (VIMAX)
— Invesco NASDAQ 100 ETF (QQQM)
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Update 08/17/21: This story was published at an earlier date and has been updated with new information.