It’s March and that means it’s time for March Madness, the annual celebration of college basketball’s finest, also known as the NCAA Tournament. What appears to be innocent actually costs U.S. employers several billion in lost productivity every year.
Well, at least folks in Lawrence, Kansas, Chapel Hill, North Carolina and Corvallis, Oregon, among other locations are happy, while fans in East Lansing, Michigan (rightfully so) are smarting over Michigan State’s seeding.
Of course, the NCAA Tournament always culminates in the Final Four, but investors can do even better than that by looking to build their own final four of must-own index and exchange-traded funds. Fortunately, finding the best index funds is not nearly as difficult as picking a perfect March Madness bracket.
In fact, the formula for long-term investors looking for the best indices is easy: focus on low fees, highly diverse index funds that hold large amounts of equities, robust liquidity and easy-to-understand indexing concepts.
With those elements in mind, here are four of the best funds investors can use for their personal index funds Final Four.
Best Index Funds: Vanguard Total Stock Market ETF (VTI)
Expenses: 0.05%, $5 per $10,000 invested
If you’re not a fan of the ETF wrapper, don’t worry because the Vanguard Total Stock Market ETF (VTI) is available as a traditional index fund via Vanguard’s Admiral and Investor share classes.
Regardless of share class, it is not a stretch to say VTI is something of a legend among index funds, as highlighted by its nearly $386 billion in assets under management across its various share classes. That includes $54.4 billion as of the end of February in the ETF wrapper.
One of the reasons why VTI is one of the most popular index funds is fees, or lack thereof. As in VTI charges just 0.05% a year, or $5 per $10,000 invested, making it less expensive than 95% of rival index funds.
As seasoned index fund and ETF investors know, cheap does not always mean good. VTI, however, merits its place in the best index funds conversation for reasons beyond its paltry fee. For example, VTI gives investors exposure to a deep bench of stocks — 3,698 to be precise.
That means this index fund is a broader play on U.S. stocks than S&P 500 index funds. VTI’s differences relative to S&P index funds are meaningful over the long haul. Since the start of the current bull market in March 2009, VTI has outpaced S&P 500 index funds by more than 600 basis points.
Best Index Funds: Vanguard Total International Stock ETF (VXUS)
Expenses: 0.13%
For index fund investors looking for an international equivalent of the aforementioned VTI, they do not need to stray out of the Vanguard stable, because the Vanguard Total International Stock ETF (VXUS) is one of the best international index funds.
VXUS has a couple of notable perks. For instance, this index fund does not force investors to choose between developed and emerging markets because both are represented in VXUS. VXUS devotes 17% of its weight to emerging markets and the remainder of the index fund is allocated to ex-U.S. developed markets.
Like VTI, VXUS has a deep bench. A really deep bench as the international index fund is home to over 5,944 stocks with a median market cap of $20 billion, according to Vanguard data.
And like VTI, VXUS is an inexpensive index fund. Investors pay just 0.13% a year, which is reasonable among international index funds.
Best Index Funds: iShares MSCI USA Minimum Volatility ETF (USMV)
Expenses: 0.15%
In the most traditional sense, an index fund tracks a cap-weighted index, so the largest stocks in the index command the biggest weights within the fund. Those are the types of index funds many investors are most familiar with, but thanks to the smart/strategic beta movement in the ETF universe, there are some unique approaches to standard index funds.
One of the most popular is reduced volatility and the iShares MSCI USA Minimum Volatility ETF (USMV) is a king among index funds with this objective. The $10.4 billion USMV, which has gathered more new assets this year than all but one other ETF, follows the MSCI USA Minimum Volatility (USD) Index.
In the case of this index fund, reduced volatility does not mean exceptionally boring, as stodgy utilities and telecom stocks combine for less than 13% of USMV’s weight. Healthcare and consumer staples names combine for over a third of the index fund’s weight, with the largest individual sector weight being 21.1% to financial services.
Familiar names found in USMV include Dow components Johnson & Johnson (NYSE:JNJ) and McDonald’s Corp (NYSE:MCD). USMV charges 0.15% per year, which is reasonable among strategic beta index funds.
Guggenheim Invest S&P 500 Pure Value ETF (RPV)
Expenses: 0.35%
Plenty of funds and ETFs can be discussed as member of the best index fund crowd, but only the Guggenheim Invest S&P 500 Pure Value ETF (RPV) can claim the title of best-performing ETF since the start of the current bull market in March 2009. From March 2009 through March 2016, RPV turned $10,000 into more than $62,000, according to Morningstar data.
Like USMV, RPV is not a traditional cap-weighted index fund. In RPV, this is an index fund rooted in the value factor. The recipe works as Morningstar has a five-star rating on RPV for the trailing five-year period. That is more proof this is one of the best index funds.
Financial services, consumer discretionary and utilities stocks combine for nearly 56% of RPV’s weight. No stock accounts for more than 2.67% of RPV’s weight. The index fund’s top 10 holdings include Alcoa (AA) and Best Buy (BBY).
RPV’s annual expense ratio is 0.35%, or $35 per $10,000 invested.
As of this writing, Todd Shriber was long JNJ stock.
