Editor’s Note: This article was updated on April 12, 2021, to correct the expense ratio for the Schwab Emerging Markets Equity ETF.
Index funds have become some of the most widely-followed assets on Wall Street of late, with record-breaking capital inflows. Recent research by Arun Rangarajan of Harvard University defines index investing as “investing in a predefined and publicly known list of stocks using a publicly disclosed and replicable strategy.” Today’s article looks at index funds that could be appropriate for income investors.
Given the growth of the importance of index funds in portfolios, individuals understandably want to learn more about them. For instance, most retail investors know that if you hold an index fund intended to replicate the S&P 500 index, you have a clear benchmark: the total return on the S&P 500 index.
So far in the year, the index is up about 7% and hit a record-high in early April. The SPDR S&P 500 ETF Trust (NYSEARCA:SPY), an exchange-traded fund (ETF) that tracks the returns of the index, is also up around 7% year-to-date (YTD).
With that information, here’re our seven index funds for passive income-seekers:
- Financial Select Sector SPDR Fund (NYSEARCA:XLF)
- Invesco Dow Jones Industrial Average Dividend ETF (NYSEARCA:DJD)
- iShares Global Materials ETF (NYSEARCA:MXI)
- iShares Residential and Multisector Real Estate ETF (NYSEARCA:REZ)
- Schwab Emerging Markets Equity ETF (NYSEARCA:SCHE)
- Vanguard Consumer Staples Index Fund ETF (NYSEARCA:VDC)
- Vanguard Dividend Appreciation Index Fund ETF Shares (NYSEARCA:VIG)
Investors looking to profit from the long-term growth of companies stateside could simply buy an index-tracker ETF like SPY. But in our present low interest rate environment, many investors are also looking for companies and funds with relatively juicy dividend yields. A large number of index funds offer such yields. When coupled with the potential for capital growth, such dividend-paying index funds could help fuel portfolio growth.
Index Funds to Buy: Financial Select Sector SPDR Fund (XLF)
52-Week Range: $19.36 — $35.29
Year-to-date (YTD) Price Change: Up about 17%
Dividend Yield: 2.17%
Expense ratio: 0.13% per year
In recent weeks, we have witnessed the 10-year U.S. Treasury yield climb above 1.7%, hitting a 52-week high. Most InvestorPlace readers will know that for banks, higher interest rates mean improved profit margins.
Therefore, our first index fund comes from the financial sector, including banks, asset managers, brokers, insurers and real estate investment trusts (REITs). The Financial Select Sector SPDR Fund invests in a diverse range of financial services firms. XLF started trading in December 1998; net assets stand at $38.2 billion. The fund, which has 65 stocks, tracks the returns of the Financial Select Sector Index.
Top 10 holdings make up around 55% of the fund. In other words, it is a top-heavy fund. Leadings names include Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B), JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC), Wells Fargo (NYSE:WFC), Citigroup (NYSE:C) and Morgan Stanley (NYSE:MS).
Over the past 52 weeks, the fund has returned about 76%. Trailing P/E and P/B ratios are 15.39 and 1.54 respectively. In the coming days, a new earnings season will start with reports from these banks. Therefore, volatility with short-term profit taking is likely. Long-term investors who believe banks and other financial institutions will be able to handle the current economic environment could consider investing around $29-$30.
Invesco Dow Jones Industrial Average Dividend ETF (DJD)
52-week range: $28.50 — $43.69
YTD Price Change: Up about 13%
Dividend yield: 1.37%
Expense ratio: 0.08% per year
If you’re interested in the “Dogs of the Dow” strategy, you might want to consider our next fund, the Invesco Dow Jones Industrial Average Dividend ETF. As a reminder, that investing strategy requires buying the top ten companies of the Dow Jones Index ranked by highest dividend yields. Although a “Dogs of the Dow” portfolio is usually initiated at the start of a new year, buying an index fund like DJD is possible at any time of the year.
This ETF fund provides to dividend-paying companies in the DJIA. It is based on the Dow Jones Industrial Average Yield Weighted Index, which focuses on those businesses with consistent dividend payments over the past year.
Additionally, the index is price-weighted. Both the index and the ETF are balanced twice a year. The fund started trading in December 2015 and has a market value of $136.5 million as of April 1, 2021. It currently holds 28 companies and over 57% of the fund is allocated to the top 10 stocks. Put another way, this fund is top heavy. Forward P/E and P/B ratios are 15.69 and 2.59 respectively.
Having returned about 52% in the past 12 months, the ETF saw a record-high price at the end of March. Given the robust dividend-paying blue chips in the roster, this fund could be a core addition as an index fund.
iShares Global Materials ETF (MXI)
52-Week Range: $47.57 — $88.13
YTD Price Change: Up about 7%
Dividend Yield: 1.12%
Expense ratio: 0.45% per year
As our economy begins to open up further, many individuals are looking at commodity-related manufacturing businesses. If you want to participate in the growth of businesses in the chemical, mining, construction, packaging and paper industries, then you’d typically invest in the materials sector.
Our next fund, the iShares Global Materials ETF, gives access to global companies involved with the production of raw materials, including metals, forestry, packaging and chemicals products. About a third of the holdings are U.S.-based. Next in line are the U.K., Australia, Japan and Canada, as well as several emerging markets.
MXI currently holds 104 holdings and tracks the S&P Global 1200 Materials Sector index. A large number of the stocks in this ETF could also be good plays on a greener economy for the new decade. The top 10 firms make up 31.4% of total net assets, which stand at $728 million.
Among the leading stocks are Linde (NYSE:LIN), BHP (NYSE:BHP), Rio Tinto (NYSE:RIO), L’Air Liquide Societe Anonyme pour l’Etude et l’Exploitation des Procedes George (OTCMKTS:AIQUY) and BASF (OTCMKTS:BASFY).
The fund has returned over 84% in the past year and hit a record high in mid-March. Trailing P/E and P/B ratios are 25.20 and 2.37, respectively. Those investors who would like add leading global names to their portfolios could consider buying the fund around $83.
iShares Residential and Multisector Real Estate ETF (REZ)
52-Week Range: $48.50 — $76.56
YTD Price Change: Up about 11%
Dividend Yield: 2.80%
Expense ratio: 0.48% per year
Real estate constitutes one of the most widely followed sectors. Since the start of the pandemic, analysts have been discussing a range of uncertainties ahead for our economy. Despite the question marks Covid-19 has caused, parts of the real estate sector sector has been extremely resilient. Therefore, our next fund looks at the an index fund in the segment.
The iShares Residential and Multisector Real Estate ETF invests in residential, healthcare and self-storage real estate equities stateside. REZ, which has 42 holdings, tracks the FTSE NAREIT All Residential Capped Index. Since its inception in May 2007, net assets have grown to $505.8 million.
Residential REITs in the fund top the list with 49.47%. Next are healthcare REITs (31.28%) and specialized REITs (18.65%), such as student-housing REITs. Over 58% of the fund is in the top 10 names. They include Public Storage (NYSE:PSA), Welltower (NYSE:WELL), Equity Residential (NYSE:EQR) and AvalonBay Communities (NYSE:AVB).
The fund has returned 47.8% in the past 12 months and saw a 52-week high in mid-March. Trailing price-to-cash flow (P/CF) and P/B ratios are 18.95 and 2.58 respectively. Readers might be interested to know that healthcare REITs are typically among the highest-yielding subsectors.
If you want to avoid certain real estate subsectors, such as retail, commercial or office, you might find this fund more appropriate for your portfolios. A potential decline below $70 would improve the attractiveness of the fund.
Schwab Emerging Markets Equity ETF (SCHE)
52-week range: $19.83 — $34.74
YTD Price Change: Up about 4%
Dividend yield: 2%
Expense ratio: 0.11% per year
The Schwab Emerging Markets Equity ETF invests in large capitalization (cap) and mid-cap emerging market (EM) businesses. Since its inception in January 2010, funds have grown close to $10 billion. SCHE, which tracks the FTSE Emerging Index, has 1,637 holdings. The top 10 names comprise more than 25% of assets.
Chip darling Taiwan Semiconductor Manufacturing (NYSE:TSM), social-media heavyweight Tencent (OTCMKTS:TCEHY), Chinese e-commerce and cloud leader Alibaba (NYSE:BABA), online food-delivery platform Meituan (OTCMKTS:MPNGY) and South African Internet group Naspers (OTCMKTS:NPSNY) lead the names in the roster. A deeper analysis of the fund will likely highlight the growth of spending by EM consumers as well as the increased use of technology
Financials have the largest sectoral weighting with 20.07%. Then come consumer discretionary (18.52%), IT (15.37%) and communication services (11.75%) firms. Trailing P/E and P/B ratios are 18.97 and 2.15, respectively.
Over the past year, SCHE has returned about 61%. In the case of potential profit-taking, long-term investors would find better value below $30. I like the globally diversified nature of this low-cost fund.
Vanguard Consumer Staples Index Fund ETF (VDC)
52-Week Range: $133.31 — $180.49
YTD Price Change: Up 2.18%
Dividend Yield: 2.64%
Expense ratio: 0.1% per year
Consumer Staples, our next segment, includes food, beverage, personal hygiene and health products. Most of us buy such necessities at relatively constant levels, regardless of how their prices fluctuate. The Vanguard Consumer Staples Index Fund ETF invests in a range of U.S. consumer staples companies. The fund started in January 2004.
VDC, which has 96 holdings, tracks the investment performance of the MSCI US IMI Consumer Staples 25/50 index. Leading three sectors (by weighting) are household products, soft drinks, packaged foods & meats, making up around 58% of the fund.
Top 10 holdings comprise over 60% of total net assets of about $6 billion. VDC’s top five companies are Procter & Gamble (NYSE:PG), Coca-Cola (NYSE:KO), Walmart (NYSE:WMT), Pepsi (NASDAQ:PEP) and Costco Wholesale (NASDAQ:COST).
The ETF has returned about 31% in the past 12 months and hit a record high by end of March. Trailing P/E and P/B ratios stand at 23.3 and 4.8. In case of profit-taking, especially during the current busy earnings season that is about to begin, the price could find initial support between $170 — $172.
Over the past several weeks, high-flying growth stocks have been slowing down. Capital could potentially go to other sectors, including consumer staples.
Vanguard Dividend Appreciation Index Fund ETF Shares (VIG)
52-week range: $98.40 — $148.41
YTD Price Change: Up about 5%
Dividend yield: 1.90%
Expense ratio: 0.06%
We conclude today’s discussion of index funds with another dividend-focused fund. The Vanguard Dividend Appreciation Index Fund ETF Shares tracks the returns of the NASDAQ US Dividend Achievers Select Index. It focuses on businesses with a solid record of increasing their dividends year-over-year. Analysts regard dividend growth as an important quality factor.
In retirement years, many investors want to live off dividend income — at least in part. Therefore, a fund like VIG could be an important addition to long-term portfolios. VIG began trading in April 2006. In other words, it is one of the oldest dividend growth funds available. Net assets stand around $63.2 billion. In terms of sectors, we see consumer discretionary with 22.5%, followed by industrials (21.1%), healthcare (15.1%) and technology (12.9%).
The fund has 212 holdings and the top 10 names make up about 35% of net assets. Leading holdings include technology pioneer Microsoft (NASDAQ:MSFT), the world’s largest retailer Walmart, entertainment giant Walt Disney (NYSE:DIS) and healthcare leader Johnson & Johnson (NYSE:JNJ).
The fund has returned 49% in the past year and notched its 52-week high at the end of March. Companies whose dividend grow consistently are regarded as safe havens in volatile markets. Therefore, businesses in VIG have increased annual dividends for at least 10 consecutive years. Any potential decline toward $140 would improve the margin of safety.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 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.