The 3 Best USAA Mutual Funds

By Markets Fool.com

Better known for basic banking services and insurance, USAA also offers a full line of stock and bond mutual funds. Some, of course, are better than others. Here are the best USAA mutual funds available today.

Continue Reading Below

1.USAA S&P 500 Index Fund Reward Shares
2.USAA Growth and Tax Strategy Fund
3.USAA Extended Market Index Fund

Here's the short and sweet case for each.

USAA S&P 500 Index Fund Reward Shares

It's hard to go wrong with an S&P 500 index fund. This fund tracks the performance of the S&P 500 index, which is made up of about 500 American-listed stocks that make up roughly 80% of companies by market value.

The advantage of an index fund is that you essentially get the return of the market minus a slight drag for fees. Historically, that's actually better than most stock pickers can do, as actively managed funds carry higher fees and thus have to perform significantly better than average on a pre-fee basis just to give their investors average post-fee results.

Continue Reading Below

This fund comes in two forms, but buy the Reward Shares if you can -- the annual expense is just 0.16% compared to 0.25% for the alternative class.

USAA Growth and Tax Strategy Fund

This fund is pretty novel. The USAA Growth and Tax Strategy Fund invests in a mix of stocks and municipal bonds. The goal is to generate tax-free income from the municipal bond portfolio and minimize realized capital gains (and thus capital gains taxes) in its stock portfolio.

The fund notes that it selects from stocks that have a market capitalization of at least $500 million and are included in the S&P 500 or Dow Jones Industrial Average. Stocks with a market capitalization of $1 billion or more are also included in its universe, regardless of their status as an index component.

The fund hopes to generate a return in line with the S&P 500 on a pre-tax basis, and beat it on an after-tax basis by deferring capital gains and investing in companies that have reinvestment opportunities in their businesses (read: companies that won't pay big, taxable dividends).

Impressively, the fund currently yields about 2.7%, and has proven effective at dodging Uncle Sam. Pre- and post-tax returns over the last 10 years differ by just 0.3% annually (5.46% vs. 5.16%), according to USAA. Tax efficiency is especially important for funds that will be held outside of a retirement account.

USAA Extended Market Index Fund

If you own an S&P 500 index fund but want to invest in the smaller slice of the market that isn't in the index, USAA has a fund for that. The USAA Extended Market Index Fund invests stocks that aren't in the S&P 500 index by tracking the lesser known Dow Jones U.S. Completion Total Stock Market Index.

Unfortunately, USAA doesn't seem to offer an index fund that tracks the Total Stock Market Index. So, if you'd like to own the entire market, you'll have to buy this fund in addition to its S&P 500 index fund, which was detailed above.

Though it's a little expensive for an index fund, the annual expense of 0.48% won't break the bank and is much less expensive than the average actively managed fund.

The article The 3 Best USAA Mutual Funds originally appeared on Fool.com.

Jordan Wathen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.