Index funds are one of the ideal asset classes for retirees and those nearing retirement to consider. The practicality of these instruments isn’t confined to specific age groups or situations. However, passive funds are particularly useful for retirement planners and investors for multiple reasons.
First, index funds are typically broad in nature. This is a favorable trait because it prevents investors from having to stock pick or identify specific fixed income assets. Secondly, index funds touch an array of sectors, industries, investment factors and asset classes. In turn, this helps investors — regardless of retirement status — build diversified portfolios.
Third, due to being passive investments, index funds usually feature low turnover; And that presents investors with positive tax implications. Last, but certainly not least, index funds are — in most cases — cost-effective tools. That’s vital for long-term investors because the lower a fund’s fee is, the more capital goes to where to where its supposed to go: investors’ pockets.
On that note, there are some index funds that have no fees. And with those positive attributes in mind, let’s examine some of the index funds that make for sound additions to retirement accounts and portfolios. Here are a few:
- Fidelity ZERO Total Market Index Fund (MUTF:FZROX)
- Fidelity ZERO Large Cap Index Fund (MUTF:FNILX)
- Vanguard Dividend Growth Index Fund (MUTF:VDIGX)
- Schwab Small Cap Index Fund (MUTF:SWSSX)
- Schwab Fundamental US Large Company Index Fund (MUTF:SFLNX)
- Vanguard FTSE Social Index Fund Admiral Shares (MUTF:VFTAX)
- Vanguard Real Estate Index Fund Admiral Shares (MUTF:VGSLX)
So, let’s dive in.
Index Funds for Your Retirement: Fidelity ZERO Total Market Index Fund (FZROX)
Expense Ratio: 0% per year
Yes, the Fidelity ZERO Total Market Index Fund really doesn’t have an expense ratio or annual. Plus, there’s no minimum investment with this Fidelity product. So it’s not surprising that in less than two years, FZROX has amassed nearly $4.4 billion in assets under management.
At is core, FZROX is a basic approach to total market exposure. It’s a “large blend” fund, meaning investors will gain exposure to both growth and value names here. What makes this Fidelity index fund appropriate for retirees or those just starting their retirement portfolios is the costs, or lack thereof. Retirees should be aiming to save as much as they can on fund fees because those savings flow directly to their wallets at a time when they’re not working.
Likewise, younger investors get the benefit of years upon years of capital appreciation and dividend reinvestment with FZROX while not paying any fees. One year of avoiding fund fees is useful. However, decades of doing so means a benefit that could be worth tens of thousands of dollars or more in the investor’s favor.
Fidelity ZERO Large Cap Index Fund (FNILX)
Expense Ratio: 0% per year
The Fidelity ZERO Large Cap Index Fund offers all of the same benefits of the aforementioned FZROX. But the primary difference being the two is that the FNILX focuses on domestic large-cap equities, making it an alternative to the S&P 500 or Russell 1000 tracking funds, essentially all of which carry fees.
With FNILX, investors will get a portfolio that looks similar to those of index funds and ETFs that track well-known U.S. equity benchmarks — meaning technology, healthcare and financial services are the top three sector weights.
The top 10 holdings in FNILX — which currently represent 24.53% of the fund’s weight — include Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT) and JPMorgan Chase (NYSE:JPM). This is also considered a large blend fund, but lacks the exposure to smaller companies found in the FZROX fund.
Vanguard Dividend Growth Index Fund (VDIGX)
Expense Ratio: 0.22% per year
Income is an essential part of the retirement equation. That said, the Vanguard Dividend Growth Index Fund is an example of a fund that delivers the goods for investors. What makes this Vanguard product alluring is that it emphasizes dividend growth, not yield. Some companies with high dividend yields may be strained by those payouts, and that stress can lead to dividend cuts and suspensions.
But those aren’t the type of names dotting VDIGX’s focused roster of 42 components, which have an average market capitalization of $110.6 billion.
“The fund focuses on high-quality companies that have both the ability and the commitment to grow their dividends over time,” according to Vanguard.
Moreover, industrial and consumer staples names combine for more than 36% of the fund’s roster. VDIGX has a minimum investment of $3,000, a price of admission plenty of market participants are willing to pay as highlighted by the fund’s $39.5 billion in assets under management.
Schwab Small Cap Index Fund (SWSSX)
Expense Ratio: 0.04% per year
While small-cap stocks are generally more volatile than large-cap equivalents, a modest allocation to this group can help retirees boost capital appreciation. And it’s best to access the asset class with a broad approach rather than attempting to identify the best individual stocks. That said, the Schwab Small Cap Index Fund accomplishes those objectives for investors.
Home to nearly 2,000 stocks, SWSSX is one of the cheapest small-cap index funds out there. Consider this: the average actively managed small-cap mutual fund charges 1.20% per year, or $120 on a $10,000 investment. That’s pricey, and almost punitive when considering data that highlights just how hard it is for active managers to outperform broader benchmarks in the small-cap space.
Additionally, because SWSSX is a passive index fund, its turnover is lower than that of rival actively managed products. In turn, this means tax drag with this product is lower — and that’s a benefit to investors.
Overall, healthcare, financial services and industrial stocks combine for approximately 51% of the SWSSX roster.
Schwab Fundamental US Large Company Index Fund (SFLNX)
Expense Ratio: 0.25% per year
The Schwab Fundamental US Large Company Index Fund differs from the other funds mentioned here in that it’s not cap-weighted. Rather, SFLNX is fundamentally weighted and its methodology goes beyond focusing on a single concept or factor.
SFLNX follows the Russell RAFI US Large Company Index, which “utilizes three fundamental metrics of company scale and success which may provide greater investment opportunity and lower risk than single metric methodologies, such as those that focus only on earnings or dividends,” according to Schwab.
Moreover, SFLNX classifies as a large-cap value fund — a factor that combination that struggled over the course of the recent bull market. That said, data confirms the Schwab fund performed noticeably better than the average large-cap value product.
Fortunately, SFLNX avoids some of the trouble spots of typical value funds, including large weights to energy and materials stocks. Those sectors combine for nearly 10.5% of the fund’s weight. Also, a favorable trait with SFLNX is its nearly 19% weight to information technology stocks, which is well above the category average.
Vanguard FTSE Social Index Fund Admiral Shares (VFTAX)
Expense Ratio: 0.14% per year
Environmental, social and governance (ESG) investing is often viewed as a concept reserved for a young audience. This is primarily due to the issuers of these products targeting millennials and members of Generation Z. That said, though, there are no age restrictions or requirements for embracing the benefits of ESG. And therefore, the Vanguard FTSE Social Index Fund Admiral Shares is a solid choice for any investors looking to get their feet wet in the ESG fund arena.
VFTAX, which carries a $3,000 minimum investment, has a traditional ESG approach. According to Vanguard, it “excludes stocks of certain companies in the following industries: adult entertainment, alcohol, tobacco, weapons, fossil fuels, gambling, and nuclear power.”
Even with those exclusions, this Vanguard index fund still has a lineup of 477 stocks and some of the industries that are barred from the fund (energy) are struggling right now. So, VFTAX may offer better near-term returns than the S&P 500.
Due to what’s left out, many ESG funds — VFTAX included — often overweight other sectors. Fortunately, though, that can and does usually included tech and healthcare — which combine for more than 47% of VFTAX’s weight.
Vanguard Real Estate Index Fund Admiral Shares (VGSLX)
Expense Ratio: 0.12% per year
Real estate fills income gaps and is usually a defensive sector, making the Vanguard Real Estate Index Fund Admiral Shares a relevant consideration for retirement investors.
Adding to the allure of this index fund in the current climate are two factors. First, real estate stocks are struggling this year, indicating there could be some value to be had in a sector that commands premiums relative to the broader market. Secondly, real estate is a rate-sensitive sector and with interest rates poised to remain low for years to come. In turn, this means rate risk is essentially off the table with index funds like VGSLX.
Also, the VGSLX is heavily allocated to specialized, residential and retail REITs and features a low weight to hotel REITs, which have been battered by the novel coronavirus pandemic. Speaking of the outbreak, of the fund’s highlighted here, VGSLX is the most sensitive to that issue — meaning interested investors can probably wait for things to settle down before buying this index fund.
Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.