Index funds may be boring and passively managed, but these qualities are key components of what make the best funds to hold over the next decade.
We’re here to help you identify the best funds. We won’t stop at just a handful of index funds, though — we’ll hand-pick seven of the best index funds that stand a good chance of beating the S&P 500.
As any smart investor might guess, we need to find index funds that have styles, objectives and holdings that make them more than a broad mix of large-cap stocks. These index funds will need to hold small- or mid-cap stocks or the right mix of large-cap stocks with top growth potential over the next 10 years. And a few wisely chosen sector funds will be smart choices for our list.
With that backdrop, in no particular order, here are seven of the best index funds to hold for the next decade.
7 Best Index Funds to Hold for the Next Decade: Vanguard Total Stock Market Index (VTSMX)
Expenses: 0.17%, or $17 for every $10,000 invested
Minimum Initial Investment: $3,000
Investors looking for a mutual fund that makes for either a solid core holding or as a standalone investment, Vanguard Total Stock Market Index (VTSMX) is a solid choice.
VTSMX is the biggest mutual fund in the world for a reason. Although the vast majority of the holdings in VTSMX are large-cap stocks, such as Apple (AAPL) Exxon (XOM) and Microsoft (MSFT), the presence of small- and mid-cap stocks in the fund gives it a slight edge over S&P 500 index funds, especially for long-term periods, such as 10 years.
Although past performance is no guarantee of future results, the past decade does reveal the edge that total stock market funds hold over S&P 500 index funds. The 10-year annualized return for VTSMX is 7.5%, whereas the return for one of the best S&P 500 index funds, the Vanguard 500 Index (VFINX), was 7.2%. While that’s not an enormous difference, smart investors know that every little edge adds up in the long run.
7 Best Index Funds to Hold for the Next Decade: Vanguard Mid Cap Index (VIMSX)
Expenses: 0.23%, or $23 for every $10,000 invested
Minimum Initial Investment: $3,000
Another Vanguard mutual fund making our list of top index funds is Vanguard Mid Cap Index (VIMSX).
Conventional wisdom holds that if you want to beat the long-term returns that large-cap stocks have historically provided investors, buy small-cap stocks. But investors may be smarter to buy mid-cap stocks instead or, even better, buy one of the best mid-cap index funds like VIMSX.
Again, history doesn’t always repeat but VIMSX returned 8.5% to its shareholders over the past 10 years, whereas large-cap stocks, as measured by the S&P 500, averaged 7.7% and small-cap stocks, as measured by the Russell 2000, put up 7.4%.
Although some of the top holdings in VIMSX, such as AvalonBay Communities (AVB), Chipotle Mexican Grill (CMG) and Fiserv (FISV), have market caps above $20 billion, the average market cap for VIMSX is $10.4 billion.
7 Best Index Funds to Hold for the Next Decade: Powershares QQQ (QQQ)
Expenses: 0.20%, or $20 for every $10,000 invested
One of the best index funds to bet on growth for the next decade is Powershares QQQ (QQQ).
You won’t likely find a better fund that passively invests in a select group of large-cap growth stocks that have great long-term potential than this ETF. QQQ tracks the cap-weighted Nasdaq 100 Index, which consists of 100 of the largest non-financial stocks in the Nasdaq Composite, such as Amazon (AMZN), Alphabet (GOOG, GOOGL) and Facebook (FB).
Top sectors in QQQ include technology, consumer discretionary, and biotechnology stocks.
Barring an extreme outlier event, such as the dotcom implosion of the early 2000s, growth stocks will likely lead value stocks and the S&P 500 over the next 10 years.
7 Best Index Funds to Hold for the Next Decade: iShares Russell 2000 (IWM)
Expenses: 0.20%, or $20 for every $10,000 invested
Small-cap index funds can outperform the S&P 500 over long periods, and iShares Russell 2000 (IWM) is an outstanding ETF to do the trick.
In the aggregate, small-cap stocks have historically produced higher returns than large-cap stocks. Therefore, if you are investing for a long-term period, such as 10 years, a low-cost index fund that tracks the Russell 2000 index is a smart choice.
Although the performance for the past 10 years has IWM and the S&P 500 nearly even, the 15-year annualized return of 7.5% for IWM crushes that of 4.9% for the S&P 500.
7 Best Index Funds to Hold for the Next Decade: Health Care SPDR (XLV)
Expenses: 0.14%, or $14 for every $10,000 invested
Healthcare stocks will likely be market leaders over the next 10 years and Health Care Select Sector SPDR (XLV) is one of the best index funds to cover the sector.
The health sector has three major factors that will likely keep it growing at a market-leading pace for years or decades to come:
- Aging Population: The baby boom generation — U.S. citizens born between 1946 and 1964 — is the largest segment of the population, and their healthcare needs will only increase over the coming years.
- Advancement in Technology: New and improved technologies will continue to create demand for new drugs, better medical devices and improved medical services.
- Defensive Investing:When the economy slows, people still need to buy their drugs and go to the doctor. This makes health stocks a smart defensive play and is another support level for greater total returns over the next decade.
XLV primarily invests in large, high-quality health stocks like Johnson & Johnson (JNJ), Pfizer (PFE) and Gilead Sciences (GILD).
7 Best Index Funds to Hold for the Next Decade: Technology SPDR (XLK)
Expenses: 0.14%, or $14 for every $10,000 invested
Another sector that is likely to outperform the broader market indices in the next decade is technology, which makes Technology Select Sector SPDR (XLK) a smart choice in index funds.
Ten years ago, iPhones and Facebook didn’t exist, but today they are household names that are woven into the fabric of our culture. And innovations like these are likely to remain at the forefront of economic growth over the next 10 years.
Although XLK doesn’t provide exposure to small- and mid-cap tech firms, investors get a good dose of high-quality large-cap firms like Apple (AAPL), Microsoft (MSFT) and Facebook (FB).
7 Best Index Funds to Hold for the Next Decade: Energy Select Sector SPDR (XLE)
Expenses: 0.14%, or $14 for every $10,000 invested
Short-term weakness can translate into long-term strength and Energy Select Sector SPDR (XLE) may very well be a benefactor of this contrarian investment idea in the next 10 years.
Unless a real, mass movement to alternative fuels takes place over the next decade, the demand for oil and today’s conventional fuels will normalize when global economies recover.
Economic forecasts and a range of market analysts expect that the price of a barrel of oil could return to a level of somewhere between $70 and $100 within the next three to five years. That would mark a double in price from the current range that is bouncing between $40 and $50. And growth for the next decade could be greater.
XLE tracks the S&P Energy Select Sector Index, which means that all of the holdings are large-cap stocks, such as Exxon Mobil (XOM), Chevron (CVX) and Schlumberger (SLB).
As of this writing, Kent Thune did not personally hold a position in any of the aforementioned securities. However he holds VTSMX, IWM, XLV, and XLE in various client accounts. His No. 1 holding is his privately held investment advisory firm in Hilton Head Island, SC. Under no circumstances does this information represent a recommendation to buy or sell securities.
