Index funds are powerful investments for investors who prefer to invest their portfolios passively. These types of best index funds track a specific market index (like the S&P 500 or the Dow Jones Industrial Average).
This means that an index fund effectively matches the performance of that index. They also have built-in diversification, consistent results, and low volatility.
Why Index Funds?
The best index funds can help you build wealth by diversifying your portfolio while minimizing your fees. Investing in an index fund is less risky than investing in individual stocks or bonds, as index funds often hold hundreds of stocks.
An index fund can be either a mutual fund or an exchange-traded fund (ETF). Investors buy mutual fund shares directly from asset management companies, while shares in ETFs are bought and sold through exchanges.
Index funds spread your investment risk across the stocks or bonds of many different sole proprietorships. Buying an entire stock index fund is like owning the entire US stock market in a single fund.
Investing in a full equity index fund gives you an easy and inexpensive way to diversify your US equity exposure. In most cases, the funds require extremely low expense ratios.
But not every option is created equal – each is based on different underlying indices and methodologies to track the US stock market.
Total Stock Market Index Funds are an ideal choice for diversifying a bond portfolio and they are tax-efficient, which makes them good for a taxable brokerage account as well.
Forbes Advisor has analyzed dozens of options to determine what we believe are the best stock index funds currently available.
How do you invest in the best index fund?
As a mutual fund investor, you can broadly invest in two investment styles – active and passive.
In active investing, you put your money in a mutual fund, and then an expert called a fund manager uses his expertise to build a portfolio of securities.
These tactical calls include what stocks to buy, what price to buy, which stocks to sell, what price to sell, etc. This type of investment is called active investing, and the funds are called actively managed mutual funds.
With passive investing, you are still investing your money in a mutual fund and there is a fund manager. But the fund manager is there to use their expertise in building a portfolio and then making tactical investments on your behalf.
Instead, it builds a portfolio and holds it in exactly the same proportion as an index. These indices such as SENSEX or NIFTY 50 are a basket of shares that are compiled according to a specific set of rules.
In contrast to active investing, with passive investing the fund manager does not select stocks of his choice to build a portfolio and does not make any tactical calls.
This style of investing is known as passive investing, and the category of mutual funds that follows such a strategy is known as index funds.
So an index fund is simply a type of mutual fund that tracks a market index and holds all stocks in a given index in the same proportion as the index.
How to choose an index fund
Index funds hold asset baskets to track a market index such as the S&P 500. Index funds are passively managed, ie the fund’s holdings are fully determined by the index that the fund tracks. The aim of an index fund is to track the performance of the underlying index.
The returns generated by an index fund usually never exceed the performance of the index itself, if only because of the expense ratios of the index funds, ie the annual management fees charged by the index fund managers.
Passively managed index funds are more likely to outperform funds with active managers in the long term.
Consider these key factors when choosing an index fund:
- Target Market Segment: Some index funds give the portfolio exposure to the broader US equity market by tracking indices such as the S&P 500, while other index funds track narrower indices that focus on specific stock market sectors, industries, countries or company sizes.
- Your investment goals: Some stock market indices and thus also some index funds track companies with specific characteristics such as high growth potential, reliable dividend payments in the past or compliance with environmental, social and governance standards (ESG).
- Expense Ratio: The expense ratio of an index fund, i. H. the percentage of your investment paid annually as a management fee to the manager of the index fund can vary widely.
A good expense ratio for an entire stock index fund is about 0.1% or less, and a small number of index funds have an expense ratio of 0%. Specialized index funds usually have higher expense ratios.
- Minimum Investment Required: Some index funds have minimum investments of $1,000 or more. ETF index funds are available for a single share price.
- Benchmark Tracking Performance: How closely an index fund tracks its underlying index can vary. The performance of the best index funds correlates very strongly with their benchmark indices.
Who should invest in an index fund?
Passively managed index funds can be useful for investors who want to keep their stock investment simple or who don’t want to select high-performing fund managers, etc. Here is a list.
- Investors who do not want to follow the performance continuously: When investing in actively managed funds, you must keep an eye on the performance of the fund. In the event of a crash, the fund could fall more than the markets or the average for its category.
The Fund may not even be able to achieve market-level returns due to poor investment decisions. All of this requires regular review and tracking of fund performance.
Index funds eliminate this need. The fund portfolio and performance are linked to a specific index. So investors can forget about it and then forget about it. - Investors who are satisfied with the returns at the market level: If you, as an investor, are satisfied with the returns of the market and do not want to take additional risk in order to achieve higher returns, then index funds are suitable for you.
Since these funds track the market index, the returns they generate are generated by the index. And since indices are really representative of the market, the returns correspond to what is known as the market level. - Investors looking to eliminate human bias: When a person makes decisions about where to put money, bias inevitably arises.
The fund manager has his or her own beliefs and beliefs, and while making informed decisions there is always a chance that prejudice may arise. Index funds completely eliminate human biases when making investment decisions.
The indices are created according to certain rules and the fund manager only replicates the index. So if, as an investor, you want zero bias investments, you can go for index funds
What are the best Index funds of 2021
Here is our list of the best index funds. Talk to your financial advisor if you have one. Our selection of the top index funds for 2021 can help you meet a wide variety of investment objectives and they have low expense ratios and low minimum investments.
1. Vanguard Total Stock Market Index Fund (VTSAX)
This is the largest stock index fund you can buy. It is one of the first index funds to cover the entire US stock market.
When you buy this fund, you are as diversified in terms of stocks as possible, which lowers your risk of catastrophe. It has developed almost identically to the S&P 500 since 2016.
This is an affordable fund for investors who don’t want to over-complicate their equity portfolio but still want the security of diversification. (It’s still smart to add bonds and international stocks to your portfolio).
- Market value: $ 757 billion
- Return to date: 17.99%
- Expense ratio: 0.04%
2. Vanguard Total Bond Market Index (VBMFX)
The Vanguard Total Bond Market Index is the largest bond index fund in the world. It is a popular fund for passive investors who want exposure to the entire US bond market.
The fund owns thousands of US Treasuries, corporate bonds, and short, long, and medium-term bonds.
- Market value: $ 240.96 billion
- Yield to date: 9.25%
- Expense ratio: 0.16%
3. Vanguard Growth Index Fund (VIGAX)
This fund invests in US large-cap stocks with strong growth potential. It tracks the CRSP US Large Cap Growth Index.
It’s riskier than other index funds based on the S&P 500, but usually more rewarding. By August 2019, the fund had invested in more than 300 investments.
One thing we like about this fund is its tremendous market value, which means that investors trust it as a profitable place to park their money. We also like the extremely low expense ratio. Lower costs mean more compound interest for you.
- Market value: $ 91.68 billion
- Yield to date: 24.58%
- Expense ratio: 0.18%
4. Vanguard dividend increase ETF (VIG)
This fund tracks the NASDAQ US Dividend Achievers Select Index, which is a group of highly profitable large-cap stocks that have seen steady dividend increases for 10 years in a row.
These include companies like Microsoft, Johnson & Johnson, and Walmart.
We like this fund because it focuses not only on dividends but dividend growth as well. It has shown solid performance (although past performance is no guarantee of future results) and low volatility.
With an expense ratio of 0.08%, this fund is significantly cheaper than the average of 0.35% for comparable funds.
- Market value: $ 46.47 billion
- Yield to date: 24.25%
- Expense ratio: 0.08%
5. Vanguard Balanced Index Fund Admiral Shares (VBIAX)
It’s smart to add stocks and bonds to your portfolio to create a nice mix of security and growth. The bonds protect your money from inflation with low risk, and the stocks provide growth.
The Vanguard Balanced Index Fund is a way to own a diverse mix of stocks and bold holdings. He invests around 60% of his assets in stocks and 40% in bonds.
This creates a balance between risk and returns for most investors. The long-term results were healthy (approx. 7%) and consistent. It’s also a great fund for new investors as all you need is $ 3,000 to buy.
- Market value: $ 42.37 billion
- Return to date: 14.64%
- Expense ratio: 0.07%
6. Fidelity Extended Market Index Fund (FSMAX)
This is a large portfolio of more than 3,000 small and mid-cap stocks, most of which are American technology, financial, industrial, and healthcare companies.
Safer stocks (like consumer staples and utilities) make up only a small fraction of this fund, so it’s good security for investors looking to grow, but this also makes it a riskier fund than the S&P 500 or similar mid-cap mixes.
However, investors were rewarded for their risk. The fund has returned 17.3% over the past decade, about 1% more than the S&P 500.
What makes FSMAX so great is its cost. At just 0.045% spends, it’s far cheaper than the average 1.07%. This explains why the portfolio turnover is so low (11%). It doesn’t pay out much in dividends, however, so you shouldn’t expect huge income from this fund.
- Market value: $ 23 billion
- Yield to date: 16.38%
- Spending: 0.045%
7. The Fidelity Total Bond Index (FTBFX)
This fund is similar to the Vanguard Total Bond Market Index, so many investors tend to hold onto both. He uses the Bloomberg Barclays U.S. Universal Bond Index as a guide for the allocation of assets in asset classes with investment grade, high yield, and emerging markets.
The difference between FTBFX and VBMFX is that this fund focuses more on high yield bonds for higher yields. This of course causes a little more risk and higher costs.
- Market value: $ 25.26 billion
- Return to date: 9.66%
- Expense ratio: 0.45%
8. iShares Edge MSCI Min Vol EAFE ETF (EFAV)
EFAV is a great way to expose your portfolio in international low volatility securities. It looks for established companies in developed markets in stable economies.
Most of the stocks come from Switzerland, the UK, and Japan, as well as the financial, industrial, and consumer staples sectors
Granted, this fund’s performance isn’t massive, but its volatility is less than most other index funds that track foreign stocks. We also like it because the dividend yield is slowly rising and spending stays low.
- Market value: $10.8 billion
- Return to date: 11.37%
- Spending: 0.20%
9. WisdomTree US Midcap Dividend Fund (DON)
This is a great index fund for investors looking to generate income from dividend-paying mid-cap companies (moderate risk and growth). It holds around 400 real estate, industrial, financial, and consumer cyclical stocks.
It receives Morningstar’s five-star rating for its history of consistently delivering above-average returns while minimizing risk.
We also consider it one of the best index funds because of its low expense ratio (0.38%) compared to the average of mid-cap funds (0.44%).
- Market value: $3.7 billion
- Return to date: 13.83%
- Spending: 0.38%
10. Invesco S&P 500 High Dividend Low Volatility ETF (SPHD)
SPHD is an index fund for investors who want to own stocks in order to generate income, but cannot take great risks. His goal is to achieve constant returns even in a declining market by replicating the S&P 500® Low Volatility High Dividend Index.
This fund does not invest in high-growth stocks or emerging markets. Instead, it looks at the 75 best-performing stocks in the S&P, with a maximum of ten stocks in any given sector.
From this list, he selects 51 with the lowest volatility in the past year. The result is a portfolio of stable, high-paying stocks. The portfolio consists primarily of energy, real estate, and utility companies.
- Market value: $3.3 billion
- Return to date: 11.83%
- Expense ratio: 0.3%
11. Direxion Daily S&P Biotech Bull 3x Shares (LABU)
LABU is a triple leveraged fund, which means it uses borrowed money to buy assets. If properly managed, the fund should earn more from increasing the value of its assets than from the cost of servicing debt. Basically, it takes your money, borrows three times as much, and then buys stocks.
The aim is to triple the daily return on the S&P Biotechnology Select Industry Index. If things go well in biotechnology, this is an extremely profitable index fund.
- Market Value: $ 510.87 million
- Return to date: 7.48%
- Spending: 1.12%
12. Fidelity ZERO Large Cap Index (FNILX)
FNILX is one of Fidelity’s experiments with free funding. It does not officially track the S&P 500, although it does track the 500 companies with the largest market capitalization, so most of the companies in the S&P 500 are tracked by this index. (Fidelity does not use the “S&P 500” name to avoid the license fee and keep costs down.)
Will this fund perform in the same way as the S&P 500? No, it tends to lag a bit behind, but the lack of an expense ratio allows investors to benefit roughly as much.
- Market value: $ 227 million
- Return to date: 18.54%
- Expense ratio: 0%
13. iShares MSCI China ETF
The iShares MSCI China ETF (NASDAQ: MCHI), which more or less mirrors the Chinese equivalent of the S&P 500, significantly outperformed the S&P 500 in 2020 with a total return of 28.89%.
Its expense ratio is 0.59%, which is slightly below the 0.70% average for a China ETF, according to ETF.com.
While adding international exposure to your portfolio is key to diversification and China’s growth potential is immense, investing in the world’s second-largest economy comes with some major risks.
There is a lack of Chinese accounting standards; there is a risk of trade disputes and uncertainties surrounding the global recovery from the COVID-19 pandemic.
While Chinese stock prices rose in 2020, it’s worth noting that Chinese stocks have performed poorly compared to U.S. stocks over the past decade.
14. Schwab Emerging Markets Equity ETF
If you’re looking for portfolio exposure to high-growth emerging markets but don’t want to focus your risk on a single economy or region, the Schwab Emerging Markets Equity ETF (NYSEMKT: SCHE) might be a good choice.
It tracks the FTSE Emerging Index, a collection of large and mid-cap stocks in more than 20 developing countries. The fund has 1,641 holdings, with the largest concentrations in China, Taiwan, India, Brazil, and South Africa. The expense ratio is only 0.11%.
The stocks of companies in emerging markets have historically outperformed US stocks. Over the past decade, the combined Schwab Emerging Markets Funds have achieved a total return of nearly 45% – compared to nearly 300% on the S&P 500.
But considering that around 85% of the world’s population lives in developing countries, long-term investors who are satisfied with volatility should seriously consider investing in this fund.
Conclusion
Which index funds are right for you? That depends on your specific needs. Some indices focus on growth. Others focus on income. Some try to keep the risk as low as possible. The best index funds for you are those that serve your general investment objectives.