Believe it or not, the next few months may be the best time to start buying into index funds.
The logic is fairly simple. The stock market has been terrifying recently. In record time, U.S. stocks have dropped more than 30% on a risk that modern financial markets have never seen before, and appear ill-equipped to handle — a pandemic.
But, this is not the first pandemic the world has ever seen. Nor is this the first stock market crash investors have ever seen. Instead, we’ve seen many pandemics and stock market crashes before. All of those pandemics passed through without ending the world. All of those stock market crashes ended, and were eventually followed by the stock market hitting new highs in the subsequent years.
Indeed, buying stocks during panics is actually the best time to buy stocks. And timing doesn’t really matter, so long as you can buy-and-hold.
Let’s say you bought into the S&P 500 in September 2008, as soon as it entered bear market territory. The index dropped another 45% before it bottomed. But, the index is up about 100% since September 2008, meaning buyers who mistimed the bottom by 45% in 2008, still made a bunch of money over the subsequent decade.
Big picture — if time is on your side, buying stocks during market panics is the best thing to do. And, the best way to buy stocks is by buying strong index funds.
An index fund is a type of mutual fund or exchange-traded fund (ETF) whose holdings are designed to match a particular market index, like the S&P 500. Buying into these funds give investors immediate diversification and exposure to certain swaths of the market, so investors can “buy stocks” without having to worry about picking the “right stocks.”
With that in mind, the best index funds for long-term investors include:
- Fidelity ZERO Large Cap Index Fund (MUTF:FNILX)
- Vanguard S&P 500 ETF (NYSEARCA:VOO)
- Schwab Total Stock Market Index Fund (MUTF:SWTSX)
- SPDR S&P 500 Trust ETF (NYSEARCA:SPY)
- Vanguard Russell 2000 ETF (NASDAQ:VTWO)
Let’s dive a little deeper into what makes each among the best index funds to buy now.
Fidelity ZERO Large Cap Index Fund (FNILX)
There are a few attractive features of the Fidelity ZERO Large Cap Index Fund.
First, as the name would imply, it tracks high quality, large cap stocks, such as Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Facebook (NASDAQ:FB), Berkshire Hathaway (NYSE:BRK.A) and Visa (NYSE:V). These stocks tend to be more stable and less risky than mid-cap and small-cap stocks.
Second, also as the name would imply, this index fund has zero expenses and zero minimums, meaning you can invest as little as you want into the index fund and won’t be charged a dime for doing so.
Third, the fund has a strong albeit short track record of delivering good returns. Total return in 2019 was over 30%, versus the S&P 500, which rose less than 30%.
All in all, then, this is a great index fund for investors seeking to minimize risk, minimize cost and maximize exposure to America’s biggest companies.
Vanguard S&P 500 ETF (VOO)
The gold standard of index funds is often considered to be the Vanguard S&P 500 ETF.
The Vanguard S&P 500 index fund has been around forever. Its inception was back in 2010. Since then, the fund has developed a solid track record of delivering 13.4% total returns per year. That’s very impressive. On top of all that, the fund is huge with tons of liquidity, so getting in and out is fairly easy to do for investors, and the expense rate is relatively low at just 0.03%.
VOO is a great “starter” index fund.
That is, it’s perfect for investors who want high-quality exposure to the stock market, but don’t want to deal with the hassle of picking where exactly they want that exposure.
Schwab Total Stock Market Index Fund (SWTSX)
For investors looking for broader exposure to the stock market beyond just large-cap stocks, the Schwab Total Stock Market Index Fund is a solid choice.
It’s important to remember that the S&P 500 is just a collection of America’s 500 biggest companies. But, the total U.S. stock market has thousands of stocks. So, by buying an index fund that tracks the S&P 500, you are actually only getting exposure to a fraction of the total market.
That’s where total stock market index funds come in. They give investors exposure to the thousands of U.S. stocks that aren’t in the S&P 500.
Of those total stock market index funds, the Schwab Total Stock Market Index Fund represents the cream of the crop. There’s no minimum investment. Expense ratios are low at 0.03%. Exposure is high, with the fund having more than 3,000 holdings. Historical returns are strong, at 12.4% per year over the past 10 years.
Overall, if you’re looking for exposure to a mix of large-cap, mid-cap and small-cap stocks, then the Schwab Total Stock Market Index fund gives you an effective, low-cost way to do so.
SPDR S&P 500 Trust ETF (SPY)
Alongside the Vanguard S&P 500 index fund, the SPDR S&P 500 Trust ETF is another great index fund to buy to track the performance of the S&P 500.
The most attractive thing about the SPDR fund is its robust diversification. At present, the fund gives investors nearly 20% exposure to the tech sector, 15% exposure to each healthcare and financial services companie, 10% exposure each to communication services, industrials and consumer defensive and cyclical names and 3% exposure each to utilities and real estate companies.
Another attractive thing about the SPDR fund is that it has been around for a while. The fund came to market in 1993, making it one of the oldest index funds out there, with one of the more impressive track records. Since 1993, the fund has reported total returns of over 9% per year.
Expense ratios are also relatively small for SPY. At 0.09%, SPY’s expense ratio isn’t the smallest in the world — but it’s pretty small considering the robust diversification and strong track record of the fund.
Big picture — SPY is a great index fund to buy for investors looking for high-quality exposure to America’s biggest and most important companies.
Vanguard Russell 2000 ETF (VTWO)
Some investors like low-risk, low-reward investments. Other investors have higher risk tolerances, and are looking for higher-risk, higher-reward investments.
For those investors, an index fund worth considering is the Vanguard Russell 2000 ETF.
The Vanguard Russell 2000 ETF is designed to track the Russell 2000 index, which is comprised of small-cap U.S. stocks. Relative to their large-cap peers, small-caps are more risky, especially during turbulent times, since they have less resources to weather downturns and therefore have higher insolvency risks. But, when times are good, small-cap stocks can often outperform their large-cap peers, because they are smaller with more long-term growth potential.
For example, from January 2000 to December 2019, the Russell 2000 rose 230%, while the S&P 500 rose just 120%. But, amid the stock market’s coronavirus selloff in 2020, the Russell 2000 has fallen 35%, while the S&P 500 has shed “just” 30%.
So, if you’re bullish on the U.S. economy and think stocks can and will bounce back, the Vanguard Russell 2000 ETF will give you more bang for your buck than any S&P 500 index fund. But, it doesn’t come without additional risks.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned securities.