In the decades since index funds first came on the scene, they’ve taken up an important niche in investing. They are a great way to get broad exposure, and take some of the guesswork out of the stock market. Even investing guru Warren Buffett has shared his thoughts on them, saying, “By periodically investing in an index fund, the know-nothing investors can outperform most investment professionals.”
I do not agree 100% with Buffet, but there are many advantages to investing in an index fund. First, index funds are a simple way of investing your money. Each fund is intended to track a designated market index composed of equities, bonds, or other financial classes. They mirror an index such as the S&P 500 index, intending to generate the same return of this broad stock index benchmark.
Why is this so useful?
One of the main advantages of investing in an index fund is the lowered risk, as you are investing in not one but a basket of stocks. This means that even if one of those stocks is doing poorly, another may be doing well, to mitigate your losses. They also offer an easier, safer way to diversify.
And as compared to their actively managed counterparts, where human beings are making the buy and sell decisions, the expenses are usually lower.
With that information in mind, here are five index funds to consider for October:
- ProShares UltraShort Bloomberg Crude Oil (NYSEARCA:SCO)
- iShares Russell 2000 Growth ETF (NYSEARCA:IWO)
- Invesco Taxable Municipal Bond ETF (NYSEARCA:BAB)
- SPDR S&P Emerging Markets Dividend ETF (NYSEARCA:EDIV)
- Vanguard Global ex-U.S. Real Estate Index Fund ETF Shares (NASDAQ:VNQI)
Index Funds: ProShares UltraShort Bloomberg Crude Oil (SCO)
Expense Ratio: 0.95%
According to ProShares “ProShares UltraShort Bloomberg Crude Oil seeks daily investment results, before fees and expenses, that correspond to two times the inverse (-2x) of the daily performance of the Bloomberg Commodity Balanced WTI Crude Oil Index.”
It’s important to note — and emphasized by the fund’s information — that this fund is made up of futures contracts, and “is not intended to track the performance of the spot price of WTI crude oil.” So if you’re looking for something that moves with the oil prices themselves, this isn’t the right fund.
This is not an index fund for conservative investors or investors who try to build their investment profile leans towards risk aversion either. It’s also not a buy-and-hold sort of index fund. After all, it is seeking to move twice as much as the underlying index (but in reverse — going up when that index goes down) per day. It is most suitable for active investors and day traders.
iShares Russell 2000 Growth ETF (IWO)
Expense Ratio: 0.24%
This year, small-capitalization stocks have underperformed tech stocks and even large-cap stocks. But recently this difference in performance has narrowed significantly.
With this index fund, investors are benefitting from the potential growth in some of the top small-capitalization stocks. The exposure is to “small public U.S. companies whose earnings are expected to grow at an above-average rate relative to the market,” as per iShares.
It is a large ETF, with net assets of $9.8 billion and a total of nearly 1,100 holdings in the fund.
Invesco Taxable Municipal Bond ETF (BAB)
Expense Ratio: 0.28%
In any well-diversified portfolio, the inclusion of bonds is almost a necessity. While there is still a significant level of uncertainty with bonds, and a few risks — including credit risks, inflation rates and interest rates — bonds are considered a safer asset class and with a lower risk compared to stocks.
Municipal bonds gained a lot of attention back in March because of “The Federal Reserve’s announcement last month that it would purchase investment-grade muni bonds as part of its efforts to provide liquidity, and more recently, the debate over whether states should be allowed to file for bankruptcy,” wrote Yahoo!
Plus, about 85% of the bonds in the fund are rated A, AA or AAA. Talk about reliable.
SPDR S&P Emerging Markets Dividend ETF (EDIV)
Expense Ratio: 0.49%
This index fund lets you diversify into equities in emerging markets instead of just focusing on U.S. stocks. The fund dividend yield of 3.95% is attractive, as is the potential growth of emerging markets.
According to data from State Street, Some key features worth mentioned about this ETF are that it “Seeks to provide exposure to the 100 highest yielding emerging market common stocks that have passed certain sustainability and earnings growth screens. For potential diversification, no single country or GICS sector can be greater than 25%, and no stock weight can be greater than 3% in the Index.”
The latest fund characteristics show that it has features of value investing, as the price-book ratio is 1.13 and the price-earnings ratio is 10.05. These values are relatively low compared to the equivalent financial ratios of funds investing in growth stocks.
This fund is suitable for investors seeking regular income in the form of dividends.
Vanguard Global ex-U.S. Real Estate Index Fund ETF Shares (VNQI)
Expense Ratio: 0.12%
Here’s another index fund that can provide regular income and exposure to non-U.S. financial assets. It has a 12-month yield of 7.5%, and as large as the most recent net assets are $5.4 billion.
Vanguard mentions that this index fund “Invests in stocks in the S&P Global ex-U.S. Property Index, representing real estate stocks in more than 30 countries.” The issuer says the fund is “more appropriate for long-term goals where your money’s growth is essential.”
Even for investors who prefer risk opportunities, as they tend to have a positive correlation with high returns, this index fund may be appealing because it provides the best of two very important investing criteria: potential growth and income.
About 47% of the fund’s holdings are in the Pacific area, with another 26% in Europe and 21% from emerging markets.
On the date of publication, Stavros Georgiadis, CFA did not have (either directly or indirectly) any positions in the securities mentioned in this article.