Interested in stocks, but don’t know what to buy? Passive investing via index funds may be right for you. The rationale behind it? It’s hard to beat the market. So, the next best thing is to buy the market via the purchase of a basket of index exchange-traded funds (ETFs).
Sure, the past year has made picking individual stocks seem like a license to print money. Just ask those who shrewdly bought Gamestop (NYSE:GME) when it was trading for single-digits. Yet, while you may luck out in the short term, success in the long term can be a challenge. That is, there’s more to investing in individual stocks than just making a quick trade on Robinhood.
The success of meme stock investors notwithstanding, typically, individual investors have to invest a lot of time and energy just to beat benchmarks such as the S&P 500 (NYSEARCA:SPY). Some may see this as a fun challenge. Yet, others may not be too keen on spending nights and weekends running stock screeners and reading 10-Ks (annual reports). With this in mind, gaining exposure to stocks via index funds may be the best move.
So, what are some of the best index funds out there? These eight, some tracking a large index, others targeting a specific investing criteria, are some of the best low-cost options:
- iShares Core S&P Mid-Cap ETF (NYSEARCA:IJH)
- iShares Core S&P Small-Cap ETF (NYSEARCA: IJR)
- iShares Core S&P 500 ETF (NYSEARCA:IVV)
- ProShares S&P 500 Dividend Aristocrats ETF (BATS: NOBL)
Invesco QQQ Trust (NASDAQ:QQQ)
- Vanguard FTSE All-World ex-US ETF (NYSEARCA:VEU)
- Vanguard Real Estate ETF (NYSEARCA:VNQ)
- Vanguard Growth Index Fund ETF (NYSEARCA: VUG)
Index Funds: iShares Core S&P Mid-Cap ETF (IJH)
When you hear “index fund,” the first thing that comes to mind may be an ETF that tracks a major index. Think the S&P 500, or the Dow Jones Industrial Average. But, this kind of investing approach doesn’t limit you to just a few indices. You can diversify, gaining exposure to different areas of the markets. And, that’s what you can do here with IJH stock, which tracks mid-cap stocks in the S&P Mid-Cap 400.
Why would you want exposure to mid-caps? These types of stocks, in companies with a $2 billion to $10 billion market capitalization may offer the best of both worlds. They’re typically better capitalized, and more stable, than small-cap ($300 million to $2 billion market cap) and micro-cap (market cap below $300 million) stocks.
But, at the same time, as they’re smaller companies, in theory they have more room to grow. This index fund includes such growth names as SolarEdge Technologies (NASDAQ:SEDG), and Bio-Techne (NASDAQ:TECH).
This index ETF has delivered a 14.3% annualized return over the past five years. And, a 12.08% annualized return over the past 10 years. With a super-low expense ratio of 0.05% ($5 per year for each $10,000 invested), IJH may be a low-cost vehicle to gain wide exposure to growth stocks.
iShares Core S&P Small-Cap ETF (IJR)
IJR stock is the small-cap counterpart of IJH. Tracking the S&P Small Cap 600, the names in this index fund may be more volatile than what’s in its mid-cap equivalent. But, while more volatile, for risk-hungry investors, this may be an interesting opportunity.
Its 5-year annualized returns come in at 14.85%, with the ETF compounding at a 12.86% annualized return over the past decade. Some of this fund’s major holdings have taken off as of late. For example, it’s held GameStop since before meme stocks entered the investing lexicon. Another major holding, MicroStrategy (NASDAQ:MSTR) has taken off as well, due to its heavy investment into Bitcoin (CCC:BTC-USD).
Now, this exposure to recent hot stocks could be a double-edged sword. It enabled the fund to zoom from around $75 per share to around $107 per share in the past six-months. But, if story stocks see another pullback, this ETF may see a big drop toward prior price levels.
Yet, for investors focused on the long haul, this again is a low-cost way (expense ratio of 0.06%) for exposure to high-risk, but possible higher-return small cap stocks. Tread carefully now, as markets seem to be deciding whether to correct further, or bounce back towards recent highs.
iShares Core S&P 500 ETF (IVV)
SPY stock may be the most common vehicle for investors to gain exposure to the S&P 500 index. But, it’s not the only way to do so. Admittedly, this may be a case of splitting hairs. But, with an expense ratio of 0.03%, versus 0.09 for SPY, IVV stock is an even lower-cost way to own the market’s key benchmark.
Some may find buying the market, instead of trying to beat it, as a bit dull. Yet, there hasn’t been anything dull about the S&P 500’s returns over the past decade. In the last 10 years, this benchmark has delivered annualized returns of 13.36%. Over the past five years? Annualized returns of 16.78%. Of course, past performance is not indicative of future results.
Markets have delivered strong returns for investors over the past decade. And, even with the headwinds from the novel coronavirus, stocks have continued to perform well. But, this may not be the case going forward.
Even so, for new and experienced investors alike, a low-cost S&P 500 ETF, like IVV stock, remains a high-quality investing vehicle. Given that time in the market, as opposed to timing the market, may be the more profitable long-term approach, consider this a great index fund to buy and hold.
Index Funds: ProShares S&P 500 Dividend Aristocrats ETF (NOBL)
Looking for yield, plus the potential for long-term appreciation? A dividend aristocrat index fund, like NOBL stock, may be the ticket. What’s a dividend aristocrat? It’s a blue-chip stock that has raised its dividend every for at least the past 25 years.
What are some examples of dividend aristocrats? Think of venerable stocks like 3M (NYSE:MMM) and Coca-Cola (NYSE:KO). However, this ETF’s largest holdings include some well-known, but not ubiquitous, companies like Nucor (NYSE:NUE), Caterpillar (NYSE:CAT), and General Dynamics (NYSE:GD).
NOBL is a low-cost index fund. But, compared to the more general ETFs listed above, it does have a higher expense ratio (0.35%). But, again, worrying about this is a case of splitting hairs. Offering up a 1.96% dividend yield, which is solid in today’s near-zero interest rate environment, this may be worth the slightly higher cost.
Also, don’t think of this as a fund that offers yield in exchange for substantially lower returns. Over the past five years, it’s delivered an annualized return of 13.06%. If you are an investor looking for portfolio income, but aren’t interested in the exhaustive research/risk involved with individual dividend stocks, a yield-focused fund like NOBL may be right for you.
Invesco QQQ Trust (QQQ)
The S&P 500 may be the benchmark for stocks in general. But, the NASDAQ 100 is the benchmark for higher-growth, tech-focused large-cap stocks. And, one of the best vehicles for exposure to this area is through QQQ stock.
I don’t have to tell you how well tech names have performed in the past year. With the Covid-19 pandemic more a tailwind than a headwind for tech companies, this index has performed extraordinarily well since early 2020. But, even before rallying 58.1% in the past year, this ETF was generating above-average returns for investors. Over the past five years, the fund has delivered annualized returns nearing 25%. In the past 10 years, its annualized return nears 20%.
With major holdings like Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), and Microsoft (NASDAQ:MSFT), that’s no surprise. Yet, after going on an incredible run before, during, and after the pandemic, the future performance of tech powerhouses may not exactly set the world on fire. With their respective valuations at historic highs, we may see more modest returns going forward.
That being said, as tech continues to become the dominant sector in our economy, it doesn’t hurt to have exposure to the highest-quality tech names. A liquid fund with a low expense ratio (0.2%), this may be another index fund to buy and hold for the long haul.
Vanguard FTSE All-World ex-US ETF (VEU)
With the Federal Reserve’s aggressive monetary policy, inflation fears are top of mind. So, what’s one of the best ways to defend your portfolio from the declining value of the U.S. dollar? International stocks can be one such method. And, if you’re looking for a liquid vehicle for international stock exposure, an ETF like VEU stock may be the perfect fit.
This index fund, which tracks the FTSE All-World index (minus companies based in the United States), holds a wide variety of large, high-quality foreign companies. Major holdings include China-based Alibaba (NYSE:BABA), Switzerland-based Nestle (OTCMKTS:NSRGY), and Japan-based Toyota (NYSE:TM).
Granted, based on its 5-year and 10-year historical performance, VEU has trailed the S&P 500. But, like I said above, past performance is not indicative of future results. Modest inflation may be a positive for stocks. But, rampant inflation? Not so much. If we see a repeat of the stagflation the U.S. economy experienced during the 1970s, we may see a repeat of that decade’s underwhelming American stock market returns as well.
As is common with the Vanguard family of funds, this ETF comes with a low expense ratio (0.08%), along with high liquidity. Yielding 1.96%, on par with NOBL, this may be a great vehicle for income-focused investors as well.
Vanguard Real Estate ETF (VNQ)
While mainly associated with stocks, there are index funds that track other asset classes. A prime example is VNQ stock, which tracks the MSCI US Investable Market Real Estate 25/50 Index. That is, it’s an index of the well-known REITs, or real estate investment trusts.
Major holdings include cell tower REIT American Tower (NYSE:AMT), warehouse property owner Prologis (NYSE:PLD), and shopping mall owner Simon Property Group (NYSE:SPG). The strong performance of alternative asset REITs, like AMT and PLD stock, relative to traditional office building and multifamily REITs, have made these names a disproportionate part of its portfolio.
Yet, as the pandemic (which has affected demand especially for office space) recedes, we may see a rebound for hard-hit office REITs. This could mean more gains ahead for VNQ, even if its cell tower REIT holdings pull back, following last year’s industry tailwinds.
Its 5-year (6.13%) and 10-year (8.9%) annualized returns have been far below the double-digit annualized gains seen with the S&P 500 and Nasdaq 100. But, if you’re looking for yield (3.5%), and diversification away from stocks, this low-cost (expense ratio of 0.12%) index fund ETF may be another great position for your portfolio.
Index Funds: Vanguard Growth Index Fund ETF (VUG)
After discussing more yield-focused index ETFs, let’s circle back to another growth-focused one. VUG stock tracks several growth-related indices, including MSCI US Prime Market Growth Index.
Which growth focused names does it hold in its portfolio? Similar to QQQ, its largest holdings include Apple, Amazon, and Microsoft. Names like Facebook (NASDAQ:FB) and Tesla (NASDAQ:TSLA) are heavily weighed in its portfolio. In short, this fund is a one-stop shop for exposure to the highest-flying large-cap stocks out there.
This fund’s holdings have been running hot over the past year. VUG’s returns in the past year (56.7%) are very close to the gains seen with the Invesco QQQ trust over the past 12 months. And, just like in the case of that index ETF, there’s the risk this one could see less impressive returns, as investors reassess valuations for high-growth companies.
So, why buy this ETF, when you could (in theory) gain similar exposure via QQQ? With an even lower expense ratio (0.04%), this fund is a lower cost way to bet that last year’s stock market winners continue to crush it through the rest of 2021.
On the date of publication, Thomas Niel held a long interest in Bitcoin. He did not (either directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.