Crashing oil prices. Dropping manufacturing activity. Global growth concerns. Recession risks. All of them have sent the stock market down the proverbial toilet in recent months.
Understandably, investors are a tad bit worried. Some have even begun to sell like crazy and run to cash or other safe havens.
Hey, I get it — it’s easy to be worried about your portfolio when the market is going down the toilet.
But the truth is, jumping to cash is probably the worst thing you can do. Staying the course for the long term is still one of the best ways to avoid and reduce market volatility. Not to mention actually get real returns.
According to investment bank HSBC (HBC), investors have been able to get a 6.38% return when staying fully invested over the last ten years. Missing just the 10 best daily return days during that time drops the return down 0.46%. Trying to time the market to avoid losses and maximize gains turns out to be one of the worse things you can do.
So how does the average Joe prevent this? Index funds of course!
The passive portfolios take the guesswork out of market-timing decisions — because index funds own all the stocks within a certain market segment. Buying index funds on a regular schedule and sticking to that plan is one of the best things you do for your portfolio.
That said, here are 10 index funds to buy no matter what the market is doing.
Best Index Funds to Buy No Matter WHAT: Vanguard Total World Stock (VT)
Expense Ratio: 0.17%
Perhaps the best way to stay invested in the market no matter what is own the ENTIRE market — from tip to tail. And the best index fund to do just that is the Vanguard Total World Stock (VT).
The $8.4 billion VT tracks the FTSE Global All Cap Index — which is a measure of large-, mid- and small-capitalization stocks of companies located around the world.
That means nearly every publically traded company in the U.S., developed and emerging world. The ETF covers more than 98% of the global investable market capitalization. All in all, that’s just under 8,000 different companies from across 47 different nations.
Seriously, name a publicly traded company. It’s in the VT.
That huge breathe of holdings makes the index fund an ideal core holding for any market condition. Moreover, it hasn’t hurt the fund on the returns department either. Over the last five years, VT has been a pretty decent performer as well. The fund has managed to produce a 6.28% annual total return. That’s not too shabby.
And as a Vanguard sponsored fund, VT is dirt cheap to own. Expenses for the index fund cost only 0.17%, or $17 per $10,000 invested.
Best Index Funds to Buy No Matter WHAT: iShares Core S&P Total U.S. Stock Market ETF (ITOT)
Expense Ratio: 0.03%
The United States still dominates in terms of world market capitalization. As a result, U.S. stocks play a major role in all our portfolios. Index funds can help you keep that role in check and on point.
The iShares Core S&P Total U.S. Stock Market ETF (ITOT) is a great way to stay invested throughout all market cycles.
ITOT tracks the S&P Total Market Index — previously the S&P 1500 Composite. This measure — and its predecessor — allows investors to track the entire U.S. stock market. That includes everything from mega-caps like Exxon Mobil (XOM) to the smallest of the small-fries, such as S&W Seed Company (SANW).
The ETF covers roughly 90% of the stocks domiciled in the U.S.
And as the name implies, that makes ITOT a core holding that investors can buy periodically and continuously throughout the year. Dollar cost averaging their way to long-term wealth. And ITOT has proven to be a winner on that front. Over the last 10 years, the index fund has managed to provide a 7.26% annual total return.
Perhaps even better, ITOT is one of the cheapest index funds around to own: Expenses come in at just 0.03%.
Best Index Funds to Buy No Matter WHAT: Vanguard FTSE All-World ex-US ETF (VEU)
Expense Ratio: 0.14%
While the U.S. still dominates, there can be something said for owning large-cap international stocks. After all, these days you’re just as likely to drive a Honda (HMC) or use shampoo manufactured by Unilever (UL, UN) as you are an American brand.
There’s a plethora of multinational firms located overseas and as the global economy has become ever more linked, where a company is based has little to do with where it get its sales from.
The Vanguard FTSE All-World ex-US ETF (VEU) makes adding these foreign multinationals a piece of cake.
VEU tracks the FTSE All-World ex US Index. This index tracks the return of large- and mid-cap stocks located in developed and emerging markets outside of the U.S. That’s roughly 50 different countries and 2520 different stocks.
All in all, VEU’s portfolio is chock-full of international stocks that are household names and multinationals. That makes it a great index fund to buy for the long haul.
Returns for the fund have been mixed since launching in 2007 — only returning about 1.17% in that time. However, much of that poor performance has more to do with the rise of the U.S. dollar and not so much the returns of the underlying stocks.
Expenses for VEU run at only 0.14%.
Best Index Funds to Buy No Matter WHAT: SPDR S&P MIDCAP 400 ETF (MDY)
Expense Ratio: 0.25%
Index funds can be used to plug gaps in a portfolio. And odds are you have a glaring one in your holdings right now — one that could be costing you some serious money over the long term. I’m talking about mid-caps.
These “goldilocks” stocks feature the best attributes of well-established large-caps as well as faster growing small-caps. For starters, mid-caps are large enough to make it through various market cycles relatively unscathed and often have strong growing dividends and financials.
These are far from start-ups. However, they aren’t too big to miss out on real growth. What you end up with is a recipe for long-term outperformance.
The SPDR S&P Midcap 400 ETF (MDY) could be the index fund of choice to snag-up shares.
The fund tracks the middle child of the S&P family — the S&P 400. This measure tracks U.S. stocks with market-caps between $1 billion and $4.5 billion. That range does chance to ensure consistency with market conditions, but MDY holds roughly 7% of all U.S. stocks.
That 7% includes firms like consumer products firm Jarden (JAH) and apartment building owner UDR (UDR). More importantly, that small percentage of stocks has managed to put up impressive long-term performance.
MDY has had an annual return of 11.02% since its inception in 1995.
Best Index Funds to Buy No Matter WHAT: iShares Core U.S. Aggregate Bond ETF (AGG)
Expense Ratio: 0.08%
There has been a lot of debate recently over the role of broad basic bond index funds in a portfolio. Some market pundits have postulated that investors should abandon these products in favor of active and “go anywhere funds” in order to cope with the new rising rate environment.
However, I’m not so sure.
If you’re using bonds as a point of stability in a portfolio, then an index fund like the iShares Core U.S. Aggregate Bond ETF (AGG) still makes a lot of sense.
Traditionally, bonds rise when stocks fall. That’s why long-term investors should own them. They’re ballast. Meanwhile, their steady coupons provide a flow of gains in any market environment.
AGG makes an ideal bond index fund as it tracks a measure of all the U.S. investment-grade bond market. That includes corporate bonds as well as U.S. treasury and mortgage backed securities.
All in all, the $33 billion fund spreads its asset base among more than 5185 different I.O.U.’s. Even better is the index funds expense ratio at just 0.08%.
The iShares Core U.S. Aggregate Bond ETF has a yield of 2.04%.
Best Index Funds to Buy No Matter WHAT: Schwab U.S. Dividend Equity ETF (SCHD)
Expense Ratio: 0.07%
It may be easy to brush off the power of dividends as we’ve become obsessed with capital gains. However, over the longer haul, dividends have been one of the major drivers of stock market performance.
Such performance turns to outperformance when those steady payouts are reinvested in good times and in bad — resulting in larger dividends the next time around.
The Schwab U.S. Dividend Equity ETF (SCHD) tracks the Dow Jones U.S. Dividend 100 Index, which is a measure of 100 of the strongest large-cap dividend payers in the U.S.
The twist is that many of these firms feature growing payouts as well. This compounds the dividend-factor even further over the longer haul. Top holdings for SCHD include home improvement store Home Depot (HD) and drug manufacturer Pfizer (PFE).
This focus on strong dividend payers helps drive a yield of 3.13% from the index fund. It’s also helped drive a 44% share price return since the index funds inception back in 2011.
Expenses for SCHD are great as well. The ETF costs a rock-bottom 0.07% to won per year.
Best Index Funds to Buy No Matter WHAT: iShares MSCI Frontier 100 ETF (FM)
Expense Ratio: 0.79%
For early investors in China, the last few decades have been amazing in terms of returns, as the nation has grown from an agrarian society to modern manufacturing/consumer powerhouse. Imagine if you could find the next China? Well, with index funds you don’t have to.
The iShares MSCI Frontier 100 ETF (FM) bets on the limited number of stocks in the “emerging” emerging markets. These are nations that are just in their infancies of economic expansion and growth.
We’re talking places like Nigeria, Romania and Sri Lanka. There’s plenty of risks, but also plenty of rewards as well. Basically, FM provides early access to the untapped potential of these so-called frontier markets.
Without the index fund, you and I would be pretty much shutout of the opportunity.
And given just how long of an opportunity this is, FM makes an ideal choice to dollar cost average and hold no matter what the market is doing — because investing in a place like Kenya is going to have some hiccups.
Expenses for FM aren’t that cheap at 0.79%. However, that is reasonable considering how hard it is to access some of these frontier nation’s stock markets.
Best Index Funds to Buy No Matter WHAT: Vanguard REIT Index ETF (VNQ)
Expense Ratio: 0.12%
Index funds are a prime way to tap alternatives as well. There’s plenty of benefits to owning real estate investment trusts — including income potential, non-correlated returns and overall higher total returns vs. the broad stock market.
The $52.7 billion Vanguard REIT Index ETF (VNQ) is the behemoth in the sector. VNQ is the largest index fund and is one of the most heavily traded. It’s also one of the broadest in terms of portfolio holdings.
VNQ tracks the MSCI US REIT Index, which includes all physical property types, but kicks out mortgage and hybrid REITs from its portfolio. Today, the ETF tracks 153 different real estate firms, including industry stalwarts like Boston Properties (BXP) and Prologis (PLD). That breath of holdings gives investors greater access to the sector and helps VNQ produce a juicy and Treasury-beating 3.98% dividend yield.
The index fund has also been a great performer over the long haul. VNQ has managed to return an average annual total return of 9.28% since its inception in 1996.
Expenses for the ETF are a Vanguard low at 0.12%.
Best Index Funds to Buy No Matter WHAT: SPDR Barclays Capital High Yield Bond ETF (JNK)
Expense Ratio: 0.40%
It’s best to think of junk bonds not as a fixed income holding, but as a slightly less volatile piece to your equity side. And that makes them perfect for index funds.
High yield bonds are made to firms with less than stellar credit ratings. In exchange for lending them money, investors are compensated with a higher coupon/yield. However, because of who you are lending to, they have often been more a total return element than more staid bond fair. That’s because prices for junk does move around more than a boring U.S. treasury bond. As a result, the coupon plus and gains or losses on the junk bond’s price make up the total return.
The real way to get this total return is to hold them for the long haul no matter what the market is doing.
At just 0.40% in expenses, the SPDR Barclays Capital High Yield Bond ETF (JNK) is the prime choice for an index fund playing the sector.
JNK tracks the Barclays High Yield Very Liquid Index. This is a measure of high yield bonds that meet some trading restrictions and often trade hands. That’s about 765 different junk bonds. Those holdings combine for a dividend yield of more than 8%.
Best Index Funds to Buy No Matter WHAT: PowerShares FTSE RAFI US 1000 ETF (PRF)
Expense Ratio: 0.39%
Smart-beta index funds — or fundamental index funds — are all the rage. The truth is most of them are garbage and reek of poor active like management. However, the ones that are good are really good.
Research Affiliates wrote the book and basically created the concept decades ago. As such, its RAFI line of indices is the standard-bearer with regards factor-based investing. The PowerShares FTSE RAFI US 1000 ETF (PRF) could be the hallmark of their efforts.
PRF holds just under a thousand U.S. stocks. But instead of weighting them according to market cap like most index funds, it weights them according to series of various factors. PRF looks at fundamental measures of size, such as book value, cash flow, sales and dividends. Each stock is scored, then is weighted based on that score.
That creates a value tilt with some small- and mid-cap exposure. That’s enough for the ETF to outperform the broader Russell 1000 index by roughly 1% a year. That may not seem like much, but it’s enough to seriously grow your nest egg. So when it comes to smart-beta index funds, PRF has actually delivered over the long haul.
Expenses for the ETF are cheap to at just 0.39%.
As of this writing, Aaron Levitt was long ITOT, FM and PRF.