Index funds are the preferred investment vehicle for the set it and forget it crowd. But not all index funds are created equal. For the best passively-managed funds to hold for the long term, you need to consider only a handful of reliable index funds.
But before we get into our list of index funds, we should define our guidelines. Here’s what we mean by reliable and how we selected our set-it-and-forget-it funds:
- Long-term track record: For evidence that the index funds we choose are reliable, we only consider those with a track record of at least five years but hopefully more than 10. We also checked to be sure there is very little tracking error, which means they closely track the respective benchmark index.
- Diverse portfolio: If you’re going to set it and forget it, it’s wise to consider index funds with diversified portfolios, rather than concentrated sector funds that focus on a niche area of the market.
- Low expenses: When you buy and hold index funds for the long term, lower expenses translate into greater returns.
- iShares Core S&P 500 (NYSEARCA:IVV)
- Vanguard Total Stock Market ETF (NYSEARCA:VTI)
- iShares Core US Aggregate Bond (NYSEARCA:AGG)
- Vanguard Value ETF (NYSEARCA:VTV)
- iShares Core Aggressive Allocation (NYSEARCA:AOA)
- SPDR SSGA Global Allocation ETF (NYSEARCA:GAL)
- IQ Hedge Multi-Strategy Tracker ETF (NYSEARCA:QAI)
Since there are dozens of index funds that could potentially meet our selection criteria, this list includes top choices from a variety of fund categories.
Index Funds to Set and Forget: iShares Core S&P 500 ETF (IVV)
Inception Date: 05/15/2000
Having recently made our list of great index funds with super low fees, iShares Core S&P 500 is a prime candidate to consider for a core portfolio holding.
When you want to passively track the stock market for the long haul, a low-cost S&P 500 index fund like IVV is the way to do it. What’s more: IVV has a performance history that reaches back more than 20 years.
For a look under the hood, IVV tracks the S&P 500, a benchmark of more than 500 of the largest U.S. stocks as measured by market capitalization. This means shareholders get exposure to big names like Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT) and Amazon (NASDAQ:AMZN).
Vanguard Total Stock Market ETF (VTI)
Inception Date: 05/24/2001
One could make a strong argument that the ultimate set it and forget it fund is the Vanguard Total Stock Market ETF.
If you plan to buy and hold for the long haul, you’ll want to consider a cheap fund that covers a broad swath of the stock market. With a track record of nearly two decades. VTI is that fund.
The VTI benchmark index is the CRSP US Total Market Index, which consists of more than 3600 U.S. stocks. This index covers the full range of capitalization, from small-, to mid- and large-cap stocks.
Since the index is cap-weighted, you get more exposure to the mega-cap stocks like AAPL, MSFT and AMZN, but you also get exposure to smaller, lesser-known companies as well.
If you want to set and forget it in the U.S. stock market, VTI may be the fund for you.
iShares Core US Aggregate Bond (AGG)
Inception Date: 09/22/2003
If you’re looking to complete the stock allocation of your set-it-and-forget-it portfolio with a cheap, diversified bond fund, iShares Core US Aggregate Bond could be right up your alley.
With AGG, you can capture the returns of the entire U.S. bond market for the low price of just $4.00 on every $10,000 invested. And since this fixed income ETF has been around for more than 17 years, it easily meets our reliability criterion.
As for diversification, AGG tracks the Bloomberg US Aggregate Bond Index, which means shareholders of this ETF get exposure to more than 8300 U.S. bonds. This broad coverage replicates the performance, less the tiny fees, of the entire U.S. bond market.
Vanguard Value ETF (VTV)
Inception Date: 01/26/2004
Large-cap value stocks can make outstanding long-term holdings, which makes Vanguard Value ETF a great index fund to set and forget.
This index fund tracks the CRSP US Large Cap Value Index, which consists of 327 large-cap value U.S. stocks such as top holdings Berkshire Hathaway (NYSE:BRK.B), Johnson & Johnson (NYSE:JNJ) and JPMorgan Chase (NYSE:JPM).
Large companies that pay dividends are generally the type of stocks that the set-it-and-forget-it crowd likes to hold. And since VTV is one of the largest and cheapest large value funds to buy, it easily earns a spot on our list of funds to set and forget.
iShares Core Aggressive Allocation (AOA)
Inception Date: 11/04/2008
If you’re looking for a one-fund solution to set and forget for more than 10 years, iShares Core Aggressive Allocation is a solid fund to consider.
It’s not often you get a low-cost ETF that offers a balance of more than one security type, which makes AOA a standout. And since many long-term investors can afford to take an above-average degree of market risk, AOA could potentially work as a standalone, long-term investment solution.
To get this balance, the AOA portfolio is a set of iShares index funds that include small-, mid- and large-cap U.S. stocks, foreign stocks and bonds. The asset allocation is approximately 80% stocks and 20% bonds.
SPDR SSGA Global Allocation ETF (GAL)
Inception Date: 04/25/2012
Investors wanting a diversified portfolio that covers multiple asset types and a range of regional and sector exposure may like what they see in SPDR SSGA Global Allocation ETF.
It would be a challenge, to say the least, to find another ETF on the market that invests in such a wide range of holdings. The GAL portfolio consists of multiple SPDR funds that cover diverse categories of investments, including U.S. equity, international equity, U.S. fixed income, high yield, commodity, REIT and TIPS.
GAL is appropriate for an aggressive investor with relatively high tolerance for risk, as the fund holds about 80% stocks and the international equity portion includes emerging-markets stocks, which are typically higher in risk than those of developed markets.
IQ Hedge Multi-Strategy Tracker ETF (QAI)
Inception Date: 09/15/2008
If you want to set it and forget it with an ETF that performs like a hedge fund, the IQ Hedge Multi-Strategy Tracker ETF could be your fund.
On the surface, QAI appears expensive with the 1.00% expense ratio. However, considering that a conventional hedge fund charges fees much higher than this and that they typically take a piece of the profits, QAI passes our low-cost criterion.
The QAI portfolio does not invest in hedge funds. Instead, it seeks to track performance, less fees and expenses, of its benchmark, the IQ Hedge Multi-Strategy Index. So, what investors end up getting is a fund that can produce returns that can outpace inflation, while keeping volatility to a minimum.
On the date of publication, Kent Thune did not personally hold a position in any of the aforementioned securities. However, he holds IVV and AGG in some client accounts. Under no circumstances does this information represent a recommendation to buy or sell securities.