The modern exchange-traded fund (ETF) was invented in 1975 by John Bogle, who founded the investing firm Vanguard Group. Today, it has more than $7 trillion of assets under management.
Bogle noticed that most money managers failed to beat the annual return of the stock market. He concluded that if investors can’t beat the market return through stock picking, they should give up and simply track the performance of the market itself. Rather than pool a bunch of stocks together in a mutual fund, Bogle devised a way to track and approximate the market’s overall performance. Thus, the ETF industry was born.
Today, the industry exceeds a value of $10 trillion. Perhaps best of all, the passive investing style of ETFs lead to much lower fees and costs than actively managed mutual funds. Given the benefits of ETFs, it should come as no surprise they remain a preferred investment vehicle.
Here are three of the best index funds to buy now.
Best Index Funds to Buy: iShares U.S. Energy ETF (IYE)
Oil and gas stocks have been the lone bright spot in the overall market this year. With crude oil prices as high as $110 per barrel this summer, its highest level since the market collapsed in 2014 and 2015, stocks of major oil and gas companies have skyrocketed.
Shares of Occidental Petroleum (NYSE:OXY) are up 108% year-to-date (YTD), Exxon Mobil (NYSE:XOM) stock is up 51% and Devon Energy’s (NYSE:DVN) share price has gained 52%. All this occurred while both the S&P 500 and Nasdaq indexes fell into a bear market. For this reason, investors may want to add some exposure to the oil and gas sector to their portfolio through a leading energy ETF.
Among ETFs that cover the oil and gas industry, the iShares U.S. Energy ETF (NYSEARCA:IYE) is the very best in terms of the coverage and diversification it offers, as well as the fees it charges. With the IYE, investors get exposure to most of the major oil production and exploration companies in the U.S.
In addition to the aforementioned oil stocks, the IYE ETF also includes Chevron (NYSE:CVX), ConocoPhillips (NYSE:COP) and Marathon Oil (NYSE:MRO), to name only a few. The fund is up 65% over the past year, pays a quarterly dividend of 34 cents per share and charges a management fee of 0.41%.
Vanguard 500 Index Fund (VOO)
The nice thing about this index is that, owing to its size, it includes stocks that have small, mid-sized and large market capitalizations and provides built-in diversification to investors. Some of the most prominent investors of all-time, including Vanguard founder John Bogle and Berkshire Hathaway (NYSE:BRK-B) chief executive Warren Buffett, urge most investors to focus on an ETF that tracks the S&P 500.
“I recommend the S&P 500 index fund and have for a long, long time to people,” said Buffett at Berkshire Hathaway’s annual meeting in 2021. In fact, VOO is one of the few ETFs that Buffett holds within Berkshire’s massive stock portfolio that is worth more than $300 billion.
With Vanguard’s S&P 500 ETF, investors gain exposure to many of the largest and best-performing stocks in the world. The fund’s top 10 holdings include blue-chip names such as Apple (NASDAQ:AAPL), Johnson & Johnson (NYSE:JNJ), UnitedHealth (NYSE:UNH) and Berkshire Hathaway. It provides an enormous amount of diversification across economic sectors that include health care, real estate, energy, technology and consumer discretionary stocks.
While VOO is down almost 17% this year at $365 per share, the drop reflects the fact that the S&P 500 index itself is down this year. But over 10 years, the fund has gained 14.36%. And best of all, Vanguard’s S&P 500 ETF is extremely affordable to own, with an expense ratio of only 0.03%.
Best Index Funds to Buy: Invesco QQQ Trust (QQQ)
Technology stocks are down this year, but they’re far from out. Many of the best-run and most profitable companies in the world are in the technology space, including Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) and Nvidia (NASDAQ:NVDA).
Long-term technology stocks can be expected to rebound and thrive, especially the market-leading names in the space. One of the best ways for investors to gain exposure to technology stocks and innovation is by investing in the Invesco QQQ ETF (NASDAQ:QQQ), which tracks the Nasdaq 100 index that is comprised of the largest tech stocks by market weighting.
Often referred to as the “Triple Q” or simply the “Q,” the Invesco QQQ Trust gives investors access to the aforementioned tech giants, as well as stocks such as Apple, Amazon (NASDAQ:AMZN), Tesla (NASDAQ:TSLA) and Meta Platforms (NASDAQ:META). The QQQ ETF is down 26% year-to-date at $297 per share, mirroring the decline in the Nasdaq. But over the last decade, the Invesco QQQ Trust has delivered a 20% return to investors.
The expense ratio is also relatively affordable at 0.2%. Additionally, the QQQ is one of the best known and largest ETFs available to investors, with assets under management of $168 billion.
On the date of publication, Joel Baglole held long positions in MSFT, NVDA, GOOGL and AAPL. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.