Index funds are passively managed mutual funds or exchange-traded funds (ETFs) that seek to replicate the performance of a major financial index, such as the S&P 500, Dow Jones Industrial Average (DJIA), or Nasdaq-100. These funds are popular among retail investors thanks to their broader stock diversification, mitigated risk and lower expenses.
Legendary investor Warren Buffett believes in the power of long-term investing in low cost index funds, especially one that tracks the S&P 500, gained slightly below 16% year-to-date (YTD). According to Buffett, even a beginner investor can benefit from impressive growth stories of some of our most important companies stateside. Examples of funds that track the S&P 500 include the iShares Core S&P 500 ETF (NYSEARCA:IVV), the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) or the Vanguard S&P 500 ETF (NYSEARCA:VOO).
As a passive investment tool, index funds do not promise big returns fast. On the contrary, they are typically designed to grow one’s investment over many years and, in fact, decades. Historically, buying and holding indexes have proven to be rewarding.
Despite occasional crashes or declines, in the long-run, the S&P 500 Index has delivered average annual gains of about 8% each year. If such returns were to continue going forward, the proverbial $10,000 invested now would be worth — without any additions — well over $68,000 in 25 years.
And if that investor were to add $3,600 each year — at the end of the year — as additional savings to the amount, the total amount would be over $333,000. Investing an extra $3,600 a year would mean about being able to save $10 a day.
Seasoned investors would concur that the stock market can be bring significant gains for those who simply invest patiently. With that information, here are seven index funds that could help you build your wealth for retirement without worrying about market volatility:
- Fidelity Mid Cap Index Fund (MUTF:FSMDX)
- Fidelity US Sustainability Index Fund (MUTF:FITLX)
- Invesco S&P 500 Equal Weight ETF (NYSEARCA:RSP)
- Schwab Emerging Markets Equity ETF (NYSEARCA:SCHE)
- Schwab S&P 500 Index Fund (MUTF:SWPPX)
- Vanguard Real Estate Index Fund ETF Shares (NYSEARCA:VNQ)
Now, let’s dive in and take a closer look at each one.
Index Funds: Fidelity Mid Cap Index Fund (FSMDX)
52-Week Range: $23.09 – $32.61
Dividend Yield: 1.03%
Expense Ratio: 0.03% per year
The Fidelity Mid Cap Index Fund provides exposure to mid-capitalization (cap) U.S. companies. The fund, which started trading in September 2011, typically invests at least 80% of assets in stocks included in the Russell Midcap Index.
Although different brokerages might have differing limits, mid-cap companies are defined as having a market value of between $2 billion to $10 billion. Most financial planners point out that they are less volatile than small-caps. On the other hand, they might offer higher growth opportunities than large-caps.
FSMDX currently has 831 holdings. Leading companies include social media heavyweight Twitter (NYSE:TWTR); pet products and services provider Idexx Laboratories (NASDAQ:IDXX); DocuSign (NASDAQ:DOCU), which provides electronic signature solution; content streaming platform Roku (NASDAQ:ROKU); and chip group Marvel Technology (NASDAQ:MRVL).
Information technology (19.04%), industrials (15.24%), consumer discretionary (12.66%), financials (12.13%) and healthcare (12.01%) companies lead the roster. The top ten holdings account for about 4.7% of net assets of $22.77 billion.
The fund is up close to 17% YTD and hit a record high in early September. The current price supports a modest dividend yield of around 1%. Interested readers could consider waiting for a pullback to invest in FSMDX.
Fidelity US Sustainability Index Fund (FITLX)
52-Week Range: $14.21 – $20.15
Dividend Yield: 0.86%
Expense Ratio: 0.11% per year
Next on our list is the Fidelity US Sustainability Index Fund, which provides exposure to equities of large- to mid-cap U.S. companies with high environmental, social, and governance (ESG) criteria. It began trading in May 2017.
FITLX, which has 279 holdings, follows the MSCI USA ESG Index. This fund is also weighted towards IT (28.76%), followed by health care (13.43%), consumer discretionary (12.06%), communication services (12.02%), and financials (11.09%).
The top 10 holdings comprise about 32% of net assets of over $1.5 billion. Among the leading names, we see Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG), Tesla (NASDAQ:TSLA), and Nvidia (NASDAQ:NVDA).
So far in 2021, FITLX is up almost 20% and has returned close to 27% within the last 52 weeks. By comparison, the YTD returns of some environmental, social and corporate governance (ESG) indices are as follow:
- Dow Jones Sustainability North America Composite Index — up 16.7% YTD;
- S&P 500 ESG Index — up 17.3% YTD;
- MSCI USA ESG Leaders Index — up 17.5% YTD.
Recent studies have shown that ESG investments can outperform traditional ones as a result of increased sustainability awareness. Therefore, interested investors should keep FITLX on their radar.
Index Funds: Invesco S&P 500 Equal Weight ETF (RSP)
52-Week Range: $105.95 – $157.46
Dividend Yield: 1.41%
Expense Ratio: 0.2% per year
The Invesco S&P 500 Equal Weight ETF provides exposure to S&P 500 companies with an equally-weighted approach. In other words, no single company dominates the ETF.
RSP tracks the S&P 500 Equal Weight Index and currently has 506 holdings. The fund which is rebalanced quarterly, started trading in April 2003. In terms of the sub-sectoral breakdown, IT comprises the highest portion with 14.45%, followed by industrials and financials with 14.45% and 13.57%, respectively.
The top-10 holdings account for 2.48% of net assets of $28.62 billion. Large-cap companies comprise 42.3% of the fund while mid-cap have a share of around 57%.
Energy firms Diamondback Energy (NASDAQ:FANG), Devon Energy (NYSE:DVN) and Marathon Oil (NYSE:MRO); hydrogen and nitrogen products manufacturer CF Industries (NYSE:CF); and crude oil and natural gas producer EOG Resources (NYSE:EOG) lead the names in the fund.
So far this year, RSP is up almost 20% and has outperformed the S&P 500 Index. Right now, it is a buy-and-hold that investors might want to wait for a pullback in.
Schwab Emerging Markets Equity ETF (SCHE)
52-Week Range: $27.10 – $34.74
Dividend Yield: 2.33%
Expense Ratio: 0.11% per year
Out next fund takes us overseas. The Schwab Emerging Markets Equity ETF provides exposure to large and mid-capitalization companies from over 20 emerging market countries.
The fund, which started trading in January 2010, follows the FTSE Emerging Index. Its net market value has reached over $9.4 billion since inception in January 2010.
Financials lead with 19.36% in sectoral allocation, followed by consumer discretionary (17.71%), IT (16.08%), communication services (11.16%), and materials (8.87%). SCHE currently has 1,639 holdings in the portfolio. The top-10 names comprise around a quarter of of net assets.
Taiwan-based chip heavyweight Taiwan Semiconductor Manufacturing (NYSE:TSM), China-based social media group Tencent (OTCMKTS:TCEHY), e-commerce and cloud networking juggernaut Alibaba (NYSE:BABA), Chinese food-delivery platform Meituan (OTCMKTS:MPNGY) and Brazil-based iron ore miner Vale (NYSE:VALE) lead the holdings in the roster.
YTD, the ETF is up nearly 2% and hit a record high in mid-February. The fund’s trailing price-earnings (P/E) and price-book (P/B) ratios stand at 16.34 times and 2.09 times, respectively. Readers who seek broad exposure to emerging markets, especially China, could consider investing in SCHE around these levels.
Index Funds: Schwab S&P 500 Index Fund (SWPPX)
52-Week Range: $50.75 – $70.03
Dividend Yield: 1.49%
Expense Ratio: 0.02% per year
The Schwab S&P 500 Index Fund provides access to 500 top U.S. companies, tracking the S&P 500 Index. Sectors represented in the fund include IT (27.43%), healthcare (12.99%), consumer discretionary (12.28%), financials (11.28%) and communication services (11.14%).
The fund has reached a net asset value of more than $63.5 billion since its inception in May 1997. The top ten holdings account for almost 29% of total net assets. In contrast to our earlier fund, RSP, it is not equally-weighted, but rather market-cap weighted. The top names in the roster include Apple (NASDAQ:AAPL), Microsoft, Amazon (NASDAQ:AMZN), Facebook (NASDAQ:FB) and Alphabet.
SWPPX returned over 17% YTD and almost 23% in the last 52 weeks. The fund’s trailing P/E and P/B ratios stand at 26.07 times and 4.32 times, respectively. Given the low expense ratio and the current dividend yield of 1.57%, SWPPX deserves your attention.
SPDR S&P Dividend ETF (SDY)
52-Week Range: $90.62 – $128.90
Dividend Yield: 2.61%
Expense Ratio: 0.35% per year
Our next fund is the SPDR S&P Dividend ETF which tracks the returns of the S&P High Yield Dividend Aristocrats Index. The ETF provides exposure to a yield-weighted index of companies in the S&P 500 that have increased dividends for at least 20 consecutive years.
SDY currently has 112 holdings, that range from financials (17.15%) to consumer staples (15.23%), industrials (14.1%), utilities (14.27%) and materials (8.61%). The fund has reached a net asset value of almost $19.7 billion since it started trading in November 2005.
The top ten holdings account for about 20% of the fund. Among the leading names in the roster include telecommunications giant AT&T (NYSE:T), oil majors Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX); utility group South Jersey Industries (NYSE:SJI), and technology giant International Business Machines (NYSE:IBM).
SDY returned over 13.3% YTD and just more than 22% in the last 52 weeks. The ETF’s trailing P/E ratio stands at 20.82 times. The fund currently supports a dividend yield of 2.65%. Interested investors would find better value between $110-$115.
Index Funds: Vanguard Real Estate ETF (VNQ)
52-Week Range: $76.01 – $110.89
Dividend Yield: 2.65%
Expense Ratio: 0.12% per year
Finally, we look at the Vanguard Real Estate ETF. The fund, which started trading in September 2004, provides exposure to U.S. real estate investment trusts (REITs).
VNQ tracks the returns of the MSCI US Investable Market Real Estate 25/50 Index and currently holds a portfolio of 171 equities. The top-10 holdings weigh about 45% of total net assets of $83.3 billion.
Leading stocks include the Vanguard Real Estate II Index Fund (NASDAQ:VRTPX); American Tower (NYSE:AMT), which operates communications infrastructure assets globally; logistics REIT Prologis (NYSE:PLD); cell tower REIT Crown Castle International (NYSE:CCI); and digital infrastructure company Equinix (NASDAQ:EQIX).
Specialized REITs have the highest slice with 38.40%. Next, we see residential REITs (14.70%) and industrial REITs (11.20%).
So far this year, VNQ is up about 21.4% and hit a 52-week high in early September. The ETF’s P/E and P/B ratios currently stand at 43.4x and 3.2x, respectively. Investors, who seek broad exposure to REITs could consider buying below $100.
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, Ph.D., 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 three 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.