Index funds can be smart investment vehicles for investors who want to minimize risk. Exchange-traded fund and mutual funds that track indexes can reduce market risk for investors through diversification and by employing a passive management approach.

When you can buy a single fund that holds dozens, hundreds or even thousands of investment securities in one basket, you have instant diversification. Since index fund managers can’t buy and sell securities at their own discretion, shareholders can reduce manager risk, which is the risk that the manager will make poor decisions, whether they are emotion-based or just bad timing.

Combining this diversification and passive management with low costs, index funds can produce superior returns, especially over the long haul, compared to actively managed funds. Investors can also select certain defensive sectors that can help to reduce risk in a portfolio.

For example, a low-cost ETF that tracks the S&P 500 index will have slightly lower volatility, as measured by standard deviation, and higher returns, compared to the average fund in the large blend category. Who doesn’t want to minimize risk and maximize returns?

With that backdrop in mind, here are seven of the best index funds that investors can buy for minimizing risk:

• iShares Core S&P 500 ETF (NYSEARCA:IVV)
• Vanguard Value Index Fund ETF Shares (NYSEARCA:VTV)
• iShares Core Conservative Allocation ETF (NYSEARCA:AOK)
• Health Care Select Sector SPDR Fund (NYSEARA:XLV)
• Consumer Staples Select Sector SPDR Fund (NYSEARCA:XLP)
• Utilities Select Sector SPDR Fund (NYSEARCA:XLU)
• IQ Hedge Multi-Strategy Tracker ETF (NYSEARCA:QAI)

Index Funds to Minimize Risk: iShares Core S&P 500 ETF (IVV)

Any good list of funds that can minimize risk for investors should arguably begin with a low-cost S&P 500 index fund like iShares Core S&P 500 ETF.

Like other index funds that track the gauge, IVV ETF is a basket of about 500 of the largest U.S. stocks, as measured by market capitalization. This means that shareholders get exposure to mega-caps like Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), and Amazon (NASDAQ:AMZN).

But investors also get exposure to hundreds of other large-cap stocks, spread across a dozen sectors of the U.S. economy. This broad diversification consisting of a multitude of time-tested companies is what reduces market risk, compared to funds with more concentrated portfolios.

The expense ratio for IVV is among the lowest in the ETF universe at 0.03%, or $3 for every $10,000 invested.

Vanguard Value Index Fund ETF Shares (VTV)

Investors wanting to invest in stocks and keep a lid on volatility can do so with a high-quality, large-cap value index fund like Vanguard Value Index Fund ETF Shares.

Value stocks tend to be less volatile than growth stocks and large-caps tend to have less volatility than small- and mid-cap stocks. U.S. stocks also carry less market risk than non-U.S. stocks. With VTV ETF, shareholders get a pure dose of all of these qualities in a basket of large-cap value U.S. stocks.

VTV tracks the CRSP Large-Cap Value Index, which consists of 329 large-value U.S. stocks, including its top three holdings, Berkshire Hathaway (NYSE:BRK.B), Johnson & Johnson (NYSE:JNJ), and JPMorgan Chase (NYSE:JPM).

As you might expect with a Vanguard fund, VTV is one of the largest ETFs of its kind with $93.6 billion in AUM and its expenses are dirt cheap at 0.04%.

iShares Core Conservative Allocation ETF (AOK)

If you’re looking for low-risk, one-fund solution, or a conservative core holding, iShares Core Conservative Allocation ETF offers a smart choice.

Perhaps the most fundamental way to minimize risk is to diversify a variety of assets, such as stocks, bonds and cash. If you want to stay on the lower end of the risk spectrum, a conservative mix of those assets would lean more on the bond side of the allocation, and less on the stock side.

The AOK ETF tracks the S&P Target Risk Conservative Index, which represents a mix of seven iShares ETFs. About 56% of the assets are in the iShares Core Total USD Bond Market ETF (NASDAQ:IUSB), approximately 17% is in IVV, roughly 11% is in the iShares MSCI International Developed Markets ETF (NYSEARCA:IDEV), and the remainder is diversified across four other index funds.

Expenses for AOK are 0.25%, a bargain for investors looking for a complete portfolio in a single fund of funds.

Health Care Select Sector SPDR Fund (XLV)

Investors who want to minimize risk by adding defensive stock index funds to their portfolio are wise to consider Health Care Select Sector SPDR Fund.

Health stocks are considered to be defensive investments because health products and services tend to remain in demand through a variety of economic conditions. Even in recession, people still need to see health providers and buy their prescribed drugs.

The XLV ETF tracks the Health Care Select Sector Index, which consists of 63 large-cap U.S. healthcare stocks, representing multiple healthcare sub-sectors, such as pharmaceuticals, healthcare equipment and supplies, healthcare providers and services, and biotechnology.

As such, shareholders of XLV get a healthy dose of large-cap stocks like JNJ, UnitedHealth Group (NYSE:UNH) and Pfizer (NYSE:PFE).

Expenses for XLV are low at 0.13%.

Consumer Staples Select Sector SPDR Fund (XLP)

A smart way to minimize risk in a portfolio is to add a diversified defensive stock fund like Consumer Staples Select Sector SPDR Fund.

Consumer staples stocks are just as the name suggests: the basic goods and services that consumers purchase for everyday living. Examples of consumer staples include food and beverage products, tobacco, household supplies, and personal hygiene products.

Stocks of companies that provide these goods and services tend to maintain more price stability during economic downturns, compared to more cyclical stocks and growth stocks.

The XLP ETF tracks the Consumer Staples Select Sector Index, and holds 33 large-cap U.S. consumer staples stocks, such as Proctor & Gamble, (NYSE:PG), Coca-Cola (NYSE:KO), and Walmart (NYSE:WMT).

Expenses for XLP are just 0.13%.

Utilities Select Sector SPDR Fund (XLU)

A smart way to minimize stocks with a combination value and defensive play, is with a large-cap utilities index fund like Utilities Select Sector SPDR Fund.

Utilities stocks, especially of the U.S. large-cap variety, have the distinction of being value stocks and defensive stocks at the same time. This inherently makes them less volatile than stocks with smaller market caps, and those with a growth objective, respectively.

Utilities companies are generally those that are associated with utilities-related industries, such as electric utilities, water utilities, renewable electricity producers, and gas utilities.

The XLU ETF tracks the Utilities Select Sector Index and holds 29 large-cap U.S. utility stocks, such as top holding NextEra Energy (NYSE:NEE), Duke Energy Corporation (NYSE:DUK), and Southern Company (NYSE:SO).

The expense ratio of XLU is cheap at 0.13%.

IQ Hedge Multi-Strategy Tracker ETF (QAI)

Investors wanting an ETF that invests like a hedge fund can minimize risk with an ETF like IQ Hedge Multi-Strategy Tracker.

As the name suggests, QAI tracks the IQ Multi-Strategy Index, which represents multiple hedge and investing styles, including long/short
equity, market neutral, fixed-income arbitrage, and other strategies.

Since hedge funds generally attempt to maintain reasonable returns, hopefully averaging above the rate of inflation, without loss of principal, the QAI ETF can be a smart way to minimize risk, with its portfolio of 65 holdings.

Additionally, hedge funds tend to have high minimum investment requirements that may be out of reach for the everyday investor. QAI offers a means of obtaining a hedging strategy, which combines multiple hedging approaches, in one ETF.

Potential investors should keep in mind that, although hedging strategies imply lower risk, and the QAI fund can help to minimize volatility, hedging strategies are not free of market risk.

Expenses for QAI on the high side for an ETF at 1.00% of assets; however, this is much lower than the typical hedge fund expenses.

On the date of publication, Kent Thune did not personally hold a position in any of the aforementioned securities. However, he holds IVV, XLV and XLP in some client accounts. Under no circumstances does this information represent a recommendation to buy or sell securities.