An index typically tracks returns on a buy-and-hold basis and therefore constitutes a passive investment approach. An index fund, also known as exchange-traded fund (ETF), is a basket of securities — some combination of stocks, bonds and commodities. Many of these funds track various indices and help investors diversify their portfolio holdings.
Over the past three decades, index funds have become some of the most popular passive investment vehicles among retail and professional investors. Low transaction costs and intraday liquidity are among the biggest benefits for investors. And even in these uncertain times, new investors are wading into the stock market.
Laura Gonzalez, Ph.D., associate professor of Finance at California State University, Long Beach, spoke with InvestorPlace via email to offer some advice to new investors. She says:
“Beginning investors need to keep in mind that the opportunity to enter the financial markets is based on institutional and regulatory protections, as well as the need to time the entry. The goal is to buy low, minimize fees and let long term diversified investments take care of market fluctuations. There is no need to invest large amounts. The key is to start small, strategically, and don’t wait until middle age.”
With all that background information, here are seven index funds for long-term portfolios:
- Direxion Work From Home ETF (NYSEARCA:WFH)
- Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (NASDAQ:PDBC)
- iShares Russell 2000 ETF (NYSEARCA:IWM)
- iShares Nasdaq Biotechnology ETF (NASDAQ:IBB)
- SPDR S&P 500 ETF (NYSEARCA:SPY)
- SPDR EURO STOXX 50 ETF (NYSEARCA:FEZ)
- Vanguard Total Stock Market ETF (NYSEARCA:VTI)
These ETFs cover a wide range of asset classes and allocations, so there’s something for everyone, no matter your investing style.
Index Funds to Buy: Direxion Work From Home ETF (WFH)
- 52-week range: $49.20-$55.83
- Expense Ratio: 0.45% per year, or $45 on a $10,000 investment.
The Direxion Work From Home ETF is one of the newest exchange traded funds on the market. It started trading on June 25, at an opening price of $50.08. On August 5, it notched an all-time high of $55.83.
It tracks the Solactive Remote Work Index, which comprises businesses offering technological infrastructure and services in four industries: cloud technologies, cybersecurity, remote communications, online project and document management.
The Solactive Remote Work Index consists of 40 companies, ten from each industry group. The top five holdings of the Direxion Work From Home ETF are Twilio (NYSE:TWLO), Inseego (NASDAQ:INSG), Crowdstrike (NASDAQ:CRWD), Avaya (NYSE:AVYA) and Okta (NASDAQ:OKTA). These make up approximately 18% of the total value of the fund.
The COVID-19 pandemic has triggered structural shifts in the way people, worldwide, are now living their lives. 2020 is quickly becoming the year of ‘home sweet home’ for many.
Thematic investing may enable market participants to diversify their portfolios while capturing trends such as stay-at-home and work-from-home. And this index fund may act as a basis for further research.
As always, investors should consider individual investment goals along with risks/return profiles and charges/expenses of each fund, such as WFH.
Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC)
- 52-week range: $11.08-$16.91
- Dividend Yield: 1.68%
- Expense Ratio: 0.61% per year, or $61 on a $10,000 investment.
The Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF invests in commodity-linked futures and other financial instruments that provide access to a diverse group of commodities.
PDBC aims to provide a long-term capital appreciation strategy that surpasses the performance of DBIQ Optimum Yield Diversified Commodity Index Excess Return, an index composed of futures contracts on 14 commodities across energy, precious metals, industrial metals and agriculture.
Gold, Gasoline, Crude Crude and Brent Crude futures have the highest weightings, comprising close to 45% of the funds. Wheat, Sugar, Soybeans and Corn make up 25.61% of the fund, while Copper, Aluminum and Zinc compose 13.93% of the ETF. Other holdings include NY Harbor ULSD, Natural Gas and Silver.
Year-to-date, the fund is down over 16%. Commodity prices are mostly dependent on supply and demand. For example, during a cold winter, as the demand for natural gas increases, so do prices. Commodity prices also typically move higher during inflationary periods, as they are widely considered a hedge against inflation.
Historically, there has been a negative correlation between commodities and stocks. Academic research shows that by investing in commodity futures or ETFs based on these contracts, market participants may be able to decrease the volatility of an all-stock portfolio without reducing their expected return.
Thus investors trying to diversify into commodities should consider this index fund further.
iShares Nasdaq Biotechnology ETF (IBB)
- 52-week range: $92.15-$146.53
- Dividend Yield: 0.29%
- Expense Ratio: 0.47% per year, or $47 on a $10,000 investment
Launched in 2001, the iShares Nasdaq Biotechnology ETF is one of the largest ETFs, and it’s run by BlackRock (NYSE:BLK), the world’s largest asset manager.
The fund tracks the NASDAQ Biotechnology Index, comprised of NASDAQ-listed companies classified as either biotechnology or pharmaceutical companies that meet additional criteria.
IBB’s five largest holdings are Amgen (NASDAQ:AMGN), Vertex Pharmaceuticals (NASDAQ:VRTX), Gilead Sciences (NASDAQ:GILD), Regeneron Pharmaceuticals (NASDAQ:REGN), and Illumina (NASDAQ:ILMN). These five make up around 35% of the fund, which invests in a total of 212 companies.
Year-to-date, IBB is up over 12%. In fact, on July 20, it hit a new all-time high. Given the recent increases in prices of individual shares, there may be some short-term profit-taking around the corner. A decline toward the $125 level is likely, which would provide potential IBB investors with a better entry point.
Within the biopharma industry, IBB could be appropriate for a wide range of long-term buy-and-hold investors with a high tolerance for short-term market fluctuations.
iShares Russell 2000 ETF (IWM)
- 52-week range: $95.69-$170.56
- Dividend Yield: 1.3%
- Expense Ratio: 0.19% per year, or $19 on a $10,000 investment.
Small-cap stocks can boost portfolio diversification and increase potential returns over time. For those looking to invest in U.S.-listed small-caps, the iShares Russell 2000 ETF may be a strong candidate.
IWM tracks the Russell 2000 and covers practically all industries. Late-stage biotech Novavax (NASDAQ:NVAX), in-home healthcare provider LHC Group (NASDAQ:LHCG), footwear corporation Deckers Outdoor (NYSE:DECK), global consumer product company Helen of Troy (NASDAQ:HELE) and BJ’s Wholesale Club (NYSE:BJ) are among the top big name holdings.
Year-to-date, IWM is down about 6%. Put another way, in recent weeks, small-caps have been lagging large-caps. Over the long-run, small-cap stocks and small-cap index funds often outperform their large-cap counterparts. However, they are typically more volatile.
SPDR S&P 500 ETF (SPY)
- 52-week range: $218.26-$339.10
- Dividend Yield: 1.69%
- Expense Ratio: 0.04% per year, or $4 on a $10,000 investment.
The S&P 500 measures the stock performance of the largest publicly-traded 500 companies in the US. These companies make up around 80% of the overall US stock market’s value and cover approximately 24 separate industry groups. The capitalization-weighted SPDR S&P 500 ETF follows this index.
For many investors, the S&P’s performance shows how U.S. equities are performing in general. The “Spider” index is one of the most widely followed equity benchmarks in the world.
The SPY index fund value proposition is simple: Investors gain exposure to the growth and profitability of U.S.-based businesses without having to rely too heavily on any individual company’s performance.
Vanguard Total Stock Market ETF: SPDR EURO STOXX 50 ETF (FEZ)
- 52-Week Range: $24.29 – 41.27
- Dividend Yield: 1.59%
- Expense Ratio: 0.29% per year, or $29 on a $10,000 investment
The SPDR EURO STOXX 50 ETF, which has 50 holdings, follows the Euro Stoxx 50 Index. While broader U.S. indices are likely to keep offering plenty of robust stocks, long-term investors may consider diversifying with shares of established companies listed in Europe, too.
The biggest sectors by weighting are Financials (14.08%), Information Technology (13.76%), Consumer Discretionary (13.66%), Industrials (12.42%) and Materials (10.81%). These five sectors account for 65% of the fund.
The total net assets stand at around $1.7 billion and the top ten holdings make up 42% of the fund. FEZ’s top five companies are SAP (NYSE:SAP), ASML Holding (NASDAQ:ASML), Linde (NYSE:LIN), Sanofi (NASDAQ:SNY), and LVMH Moet Hennessy Louis Vuitton (OTC:LVMUY). In terms of geography, Eurozone members France, Germany and the Netherlands have the highest contribution, totaling close to 80%.
So far in the year, the fund is down close to 6%. However, it’s up over 50% from its lows of March.
In recent weeks, the economic data out of Europe hasn’t been much to write home about. However, the European Central Bank has announced a large stimulus package that will likely support the economy as well as share prices of solid European businesses.
Vanguard Total Stock Market ETF (VTI)
- 52-week range: $109.49-$172.56
- Dividend Yield: 1.69%
- Expense Ratio: 0.04% per year, or $4 on a $10,000 investment
The Vanguard Total Stock Market ETF offers low-cost access to a broad basket of shares under one umbrella.
VTI, which tracks the performance of the CRSP US Total Market Index, holds 3531 stocks covering all sectors and capitalizations, from mega- to micro-, in U.S. equity markets. Technology tops the list with a weighting of 26.4%, followed by Financials (16.3%), Consumer Services (14.2%) and Health Care (14.0%).
The fund’s top 3 holdings include Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL), and Amazon (NASDAQ:AMZN). The top ten stocks make up close to a quarter of the fund.
Year-to-date, the Vanguard Total Stock Market ETF is up 5.1%. However, that metric excludes the dividend yield of 1.69%. Research shows that investors who purchase dividend stocks and reinvest the dividends to buy more shares are likely to see considerable growth in their savings.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education, including a Ph.D. degree, in the field, she has also completed all three levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.