Index funds were awfully popular in 2015. And considering the up-and-down, gut-wrenching year that’s about to be in our rear-view mirror, even more investors will be hunkering down in index funds throughout 2016.
Some investors made a lot of money in high fliers like Amazon.com (AMZN). But others felt serious pain in energy stocks, Chinese equities or other battered investments. And if you were in the latter group, the idea of index funds will certainly appeal to you in the New Year.
It’s not that these funds didn’t suffer at all in 2015, but that the built-in diversification of holding hundreds of securities helped shield against large blows. Any investor worried about more tumult in 2016 is going to make their way into this more defensive investing tool.
Today, we’re going to look at some of the best index funds to buy for the upcoming year — though the nice thing about these funds is that many are best held over much longer periods of time. In fact, many investors would do well to build a portfolio using several of these index funds as part of a buy-and-hold-forever strategy.
What’s also nice about this list of the best index funds is that many of them are among the cheapest ways to invest in their respective areas — and every cent you save today can add up to big dollars after decades of holding these investments. After all, index funds broadly beat out their actively managed brethren even backing out what you save in fees, so it’s good to have a significant amount of your portfolio dedicated to these cheap, useful funds.
So whether you’re starting to build a portfolio from scratch or you’re just looking to make a few adjustments to your existing holdings, read on as we look at some of the best index funds to buy for this upcoming year and beyond.
The Best Index Funds to Buy for 2016 – Vanguard S&P 500 ETF (VOO)
Type: U.S. Large-Cap Stocks
Expenses: 0.05%
The S&P 500 — one of America’s most well-known broad measures of stocks — is on pace to finish the year off about 1%.
That’s not a good year, but if you’re concerned about limiting losses through diversification, this fund is your best bet.
Buying a fund like an S&P 500 tracker helps defray single-stock risk by allowing you to hold hundreds of stocks within a single fund, meaning that when one of them suffers big declines, your entire investment doesn’t go down the hole with it.
Yes, you’re capping your upside potential because you’ll never really have the chance at quick doublers and triplers that you can get by buying into individual stocks. But it’s a trade off many investors are willing to make — because over the long-term, the market always goes higher. And since 1995, the S&P 500 has delivered roughly 8% in total returns.
The Vanguard S&P 500 ETF (VOO) is one of the best index funds to buy, then, because it tracks the popular S&P 500 index while taking the least amount of coin from your pocket. VOO charges 0.05% in annual expenses, or $5 for every $10,000 invested. That compares to 0.07% for the iShares Core S&P 500 ETF (IVV) and 0.09% for the SPDR S&P 500 ETF Trust (SPY).
The difference in even a single basis point in expenses can cost you hundreds of dollars when you invest for 30 or 40 years, so if all else is equal — and in the case of VOO, SPY and IVV, they essentially are — then go as cheap as you can and haul in the savings.
The Best Index Funds to Buy for 2016 – iShares Core S&P Mid-Cap ETF (IJH)
Type: U.S. Mid-Cap Stocks
Expenses: 0.12%
Domestic large caps like the companies of the S&P 500 are great for providing stability, some income and even a little bit of growth.
But another way to go is adding mid-cap stocks, companies between $2 billion and $10 billion in market capitalization. Because they’re smaller than large caps, they offer much more growth potential as a whole — after all, it’s a lot easier to double revenues of, say, $100 million than $10 billion.
Mid-caps also have the benefit of having a bit more stability than small-cap companies — both in the form of firmer balance sheets, as well as more access to financing for growth (or for survival).
The result? A group of stocks that nonetheless performs better on a risk-adjusted basis than their small- and large-cap brethren.
Among the best index funds to buy for this middle ground is the iShares Core S&P Mid-Cap ETF (IJH), which currently is heaviest in consumer products firms Jarden Corp (JAH) and Church & Dwight (CHD).
The Best Index Funds for 2016 – Vanguard Dividend Appreciation (VIG)
Type: U.S. Large-Cap Stocks
Expenses: 0.1%
Most dividend funds are, as one might guess, designed to provide investors with a good chunk of investment income. However, Vanguard Dividend Appreciation (VIG) has a slightly different bent.
Vanguard Dividend Appreciation consists of roughly 180 dividend achievers — stocks that have increased their annual payouts for at least 10 years in a row. This actually doesn’t result in a particularly high yield, however — VIG pays out 2.3%, and considering the fund has been around since 2006, don’t assume it’ll eventually “get there.”
No, instead, what VIG and its dividend screen can be counted on for is putting together a who’s who of rock-solid companies that can take a beating. With VIG, you’re getting a boatload of blue chips including Microsoft (MSFT), Johnson & Johnson (JNJ) and Coca-Cola (KO) that typically can roll with the market’s punches.
The VIG showed its true colors as a downturn safe haven in 2008, when it declined just 27% to the S&P 500’s 37%. Yes, a loss is a loss, but I’d prefer the smaller one, if I have the choice.
The Best Index Funds for 2016 – Global X SuperDividend ETF (SDIV)
Type: International Dividend Stocks
Expenses: 0.58%
If you are looking for dividend yield, the Global X SuperDividend ETF (SDIV) is probably more your speed.
The SDIV holds precisely 100 stocks that rank among the highest-yielding companies on the planet. Of course, high yield often is synonymous with high risk; sometimes the high yield is a result of the company’s stock price being battered. SDIV helps mitigate that by using an equal-weight methodology that weighs all of the stocks at roughly the same amount.
Also, the SDIV is a truly global play, not bothering with the ex-U.S. status of many international funds. American stocks comprise 30% of the fund, with heavy weightings in Australia, Britain and France as well. Top holdings aren’t going to ring many bells, though, with SDIV carrying names such as Chinese real estate play Evergrande, Finnish IT firm Elisa and British insurer Amlin.
The SDIV has been pretty volatile since its 2011 launch, and currently is in the middle of a tumble dating back to 2014 that has seen the fund lose roughly a quarter of its worth. currently is in the middle of a nearly 20% downswing dating back to 2014. Of course, for some, battered prices in such a high-yielding fund might smell of a perfect opportunity.
The Best Index Funds to Buy for 2016 – iShares U.S. Preferred Stock ETF (PFF)
Type: U.S. Preferred Stocks
Expenses: 0.47%
Another way to get dividends is the iShares U.S. Preferred Stock ETF (PFF), which deals in so-called “preferred” stocks.
Preferred stocks are a lesser-known type of security, but they absolutely belong in any diversified portfolio thanks to what they provide – namely, stable, substantial income.
These equities typically are referred to as “hybrids” because they have a few traits that make them like bonds and a few traits of stocks. For instance, you can buy preferred stock on an exchange, and it actually does represent equity in a company — just like common stock. However, preferred stock also resembles bonds in that it typically doesn’t have voting right, and it throws off a fixed amount of income.
PFF holds roughly 300 preferred shares that provide a yield of nearly 6% as of current prices. Most preferred stocks come from the financial and real estate sectors, and PFF certainly reflects that, holding preferred shares from the likes of HSBC (HBC) and Barclays (BCS), among others.
Don’t expect much in the way of capital gains. PFF has mostly traded in a range between $41 and $35.50 — basically a 15% difference from trough to peak — for the past half-decade, so you’re really not looking at PFF as a swing trading tool. You buy PFF for the dividends, and hold it until you decide you’re done collecting cash.
The Best Index Funds to Buy for 2016 – iShares Core U.S. Aggregate Bond ETF (AGG)
Type: U.S. Investment-Grade Bonds
Expenses: 0.08%*
If you want to diversify your income holdings to include the bond side of the market, one of the best index funds to buy the space broadly is the iShares Core U.S. Aggregate Bond ETF (AGG).
AGG holds roughly 3,000 domestic debt securities, with its heaviest focus on U.S. Treasury bonds (37%). However, AGG also has a significant investment in pass-through mortgage-backed securities (28%) and corporate debt of industrials (15%). The rest of the fund is rounded out by corporate debt, commercial MBS and other bonds.
Investors should be interested in high-rated debt simply because it’s relatively safe — U.S. Treasuries in specific are considered among the most secure debt in the world. Of course, safe debt doesn’t need to offer much in the way of debt to generate interest, so AGG has a fairly modest yield of 2.2%. The downside is that such debt typically doesn’t command very high interest rates, so the yields are fairly modest. AGG itself only has an SEC yield of 2.2% right now.
You’re mostly looking at AGG to preserve capital, not for growth or significant income. If you’re a younger investor, you don’t need much in the way of bond exposure. But once you’re at retirement age, AGG can help you lock in some of your nest egg and generate a little extra income.
*Includes a 0.01% fee waiver that’s currently in force through June 30, 2016.
The Best Index Funds to Buy for 2016 – SPDR Barclays High Yield Bond ETF (JNK)
Type: Junk Bonds
Expenses: 0.4%
Much like investors have a choice between safer, lower-yielding stocks and more speculative but higher-income issues, you can also squeeze a lot more income out of the bond world if you’re willing to play a little more dangerously.
High-yield debt (a.k.a. “junk”) delivers much more yield than investment-grade debt to compensate for the increased risk that the debt won’t be paid back. That’s a big concern if you’re investing in these bonds individually, but if you’re buying them en masse via a fund, you’re spreading out your risk and thus have a bit more safety.
The SPDR Barclays High Yield Bond ETF (JNK) invests in just less than 800 different bond issues, mostly based in the U.S. but also spanning other countries including Luxembourg, Canada and even the Cayman Islands.
This highly diversified debt still produces almost 7% in yield.
JNK is one of the best index funds, but investors still should be aware of JNK’s specific dangers. A poor economy can help drive defaults higher, so losses that way can eventually outweigh the high yields offered by the remaining bonds in the fund.
However, an improving economy helps keep defaults low, helping out index funds like JNK. Granted, expanding economies also can be accompanied by rising interest rates, which weighs on other debt including junk … but nonetheless, junk debt typically performs better when the economy is growing and the stock market is heading higher.
The Best Index Funds to Buy for 2016: Vanguard FTSE Developed Markets ETF (VEA)
Type: Developed-Market Stocks
Expenses: 0.09%
While the SDIV does carry some international holdings, it doesn’t hurt to have a few concentrated international plays in your portfolio, too.
The Vanguard FTSE Developed Markets ETF (VEA) is one of the best index funds for trying to get exposure to so-called “developed markets” — essentially advanced economies where incomes are higher than the rest of the world, and where markets are better regulated than other international markets. America is a developed market. Algeria isn’t.
VEA invests in companies in Europe, the Pacific and the Middle East, with its heaviest geographic concentrations going to Japan (23%) and the United Kingdom (19%). The rest of the fund is invested among 21 other countries.
Consider the VEA to be the VOO of the rest of the world — in so far as it’s a who’s who of big, blue-chip companies — many of which you and I have heard of. Nestle (NSRGY), Samsung (SSNLF) and Bayer (BAYRY) count themselves among VEA’s top 10 holdings.
That focus on stable large-caps translates into a yield of nearly 3% for this fund — a nice kicker on top of getting some international diversification.
The Best Index Funds to Buy for 2016 – Global X Next Emerging & Frontier ETF (EMFM)
Type: Emerging, Frontier-Market Stocks
Expenses: 0.58%
China and Russia haven’t performed all that well lately. However, there are other global growth opportunities out there, and most of them come from the countries represented in the Global X Next Emerging & Frontier ETF (EMFM).
BRICs are considered “emerging” markets by many, but their economic growth has slowed in recent years. But investors still can find outsize international growth potential by moving into less developed emerging markets, and even “frontier markets” — riskier but more rapidly growing than even their EM counterparts.
Few funds actually delve in these frontier markets, and EMFM is one of them. The ETF invests in companies in Indonesia, Kenya, Kazakhstan, Malaysia, Mexico and Turkey, among other countries.
EMFM can be held on its own, or you can be paired with the iShares MSCI Emerging Markets ETF (EEM) if you still want exposure to China, India and the like.
Read more about the EMFM here.
The Best Index Funds to Buy for 2016 – United States Oil Fund LP (ETF) (USO)
Type: Oil
Expenses: 0.61%
The United States Oil Fund LP (ETF) (USO) is exatly what the name implies, an index fund benchmarked to oil.
The USO doesn’t actually hold physical oil — there’s no warehouse of oil just sitting around. Instead, the USO invests in crude oil and other oil-related futures contracts, as well as forwards and swaps, all with the goal of tracking the price of West Texas Intermediate light, sweet crude oil. So, as oil prices go up, so does USO, and vice versa.
Oil prices have gone down sharply, And USO has suffered right alongside. For the year so far, USO has been nearly halved — and that’s on top of heavy losses sustained during the second part of 2014.
If you want to catch a falling knife, USO is your ticket. The outlook for 2016 is mixed, but crude inventories are on the decline and some investors are interest in bargain hunting.
The key will be a cut in output. Someone has to buckle – be it North American producers, OPEC or otherwise — to really make a dent in prices. If we don’t get that, 2016 could see the same weak-price environment that clouded 2015.
But should oil’s fortunes finally turn around in 2016, USO has a lot of upside to traverse.
Kyle Woodley is the Managing Editor of InvestorPlace.com. As of this writing, he was long EMFM, IJH, PFF and VOO. Follow him on Twitter at @KyleWoodley.
