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The beauty of index funds is that you’ll get a neat package of bundled stocks. You don’t have to pay a money manager to choose your investments for you. This means that index funds typically give way to high returns and lower fees. However, you want the best performing index funds because both reduce your risk and potentially increase profits.
The Best Index Funds:
- Schwab U.S. Large-Cap ETF (NYSEARCA: SCHX)
- iShares Core S&P 500 ETF (NYSEARCA: IVV)
- Vanguard Total Stock Market ETF (NYSEARCA: VTI)
- Invesco S&P 500® Equal Weight ETF (NYSEARCA: RSP)
- Vanguard S&P 500 ETF (NYSEARCA: VOO)
Pros and Cons of Index Funds
The pros and cons of index funds should be carefully considered before you zip online and buy one.
- They’re liquid. Liquidity in this case simply means that you can buy or sell at the end of the trading day at the fund’s net asset value. Though they’re not as liquid as stocks, which can be bought or sold at any time during the trading day, mutual funds are still some of the most liquid investment options available. ETFs can be the best of both worlds, in that they offer diversification and can be purchased on margin like stocks and you can short sell them, too. They also trade at a price that is updated throughout the day, just like stocks. You’ll get real-time pricing every time you buy and sell.
- Passive vs. actively managed. Less of your investment goes toward fees and expenses when you invest in index funds. The best performing index funds generally don’t weigh you down with fees—otherwise, they wouldn’t have as many investors.
- They’re tax-efficient. Index funds pay fewer dividends than actively managed mutual funds and they also have a low turnover rate. (Low turnover refers to the number of funds that have been replaced, or turned over, during a given year, which results in capital gains taxes.) Low turnover equals low taxes, so index funds are a great place to park your money if you’re interested in lowering your tax bite.
- Index funds don’t represent all sectors and industries. Indexes can favor only certain sectors.
- You won’t be able to see huge gains or growth. Since index funds follow an index, they’re not going to see the type of gains you could see as a day trader.
- They can be turbulent in times of volatility. Index funds were volatile during the Recession; a money manager may have been able to lessen the impact.
- They can be overvalued. Overvaluation can occur when some stocks are priced too high. You can check the index fund's price-earnings ratio and expected earnings check to see if an index fund is overvalued. It's a good idea to take overvaluation into serious consideration before purchasing an index fund.
How to Choose Index Funds
Before you leap, look into a few things:
- Do your research on the broker you’re considering. Read through more information about how to choose the best broker for you. Also, read everything you can online. Do customers talk about the broker you’re considering in forums? Have they had problems with the broker’s platforms? Frustrations with customer service?
Take that to heart, and maybe even a grain of salt. Oftentimes, these online brokers serve millions of customers. If there are 50 complaints and that’s it, in the grand scheme of things, that’s not so bad.
- Check on commissions and fees. Just check on them so you can be amazed at the low fees you’ll find. The Vanguard 500 Fund, for example, has an expense ratio of just 0.12%. Low cost, indeed.
If you choose to go the route of active management instead of indexing, you pay for the possibility of outperformance. According to Morningstar, the average actively managed fund fees are approximately 0.78% in annual fees, whereas the average index fund annual fee is about 0.18%.
- Are there some promotions going on with certain brokerage firms? A cash bonus? Something more? Obviously, that should not be the be-all, end-all of your decision, but if you qualify, that could be a very good thing.
- Choose an index. The most popular index funds track the S&P 500, but there are several other indexes that are also used for index fund tracking (the Barclays Capital Aggregate Bond Index is one example).
Best Index Funds Right Now
Benzinga has compiled a list of a few of the best index funds, and they include the following:
Schwab U.S. Large-Cap ETF (NYSEARCA: SCHX)
Schwab U.S. Large-Cap ETF has been on the market since 2009. It tracks the Dow Jones U.S. Large-Cap Total Stock Market Index and consists of over 750 of the largest U.S. companies. This ETF has holdings in companies from industrial sectors such as information technology, healthcare, consumer discretionary, communication services and finance. A few of these companies include Apple (AAPL), Microsoft (MSFT), Facebook (FB), Tesla (TSLA) and JPMorgan(JPM).
The ETF has a 52 week low of $52.05 and a 52 week high of $96.88. It has an expense ratio of .3%, a 1.61% yield and trades an average of 964,000 shares per day. SCHX has a 1 - year return of 33.67%, a 3 - year return of 14.69% and a 10 - year returns of 13.54%.
iShares Core S&P 500 ETF (NYSEARCA: IVV)
iShares Core S&P 500 ETF has been open to trade since 2000. It tracks the S&P 500 index and consists of more than 500 leading companies in the U.S. The index has companies from industrial sectors such as IT, healthcare and consumer staples. These companies include NVIDIA, Home Depot (HD), Procter & Gamble (PG) and Visa (V).
This ETF has an expense ratio of 0.03% and has AUM of $238,155 million. It has a 52-week low of $216.07 and a 52-week high of $372.48. iShares Core S&P 500 ETF has an annual dividend yield of $5.91 per share. It has high liquidity and trades more than 1.2 million shares per day. IVV has a 1-year return rate of 16.47%, a 3-year return rate of 45.74% and a 5-year return rate of 100.75%.
Vanguard Total Stock Market ETF (NYSEARCA: VTI)
Vanguard Total Stock Market ETF has been listed on the stock exchange since 2001. It tracks the CRSP US Total Market Index and consists of more than 3,500 companies. Companies from industrial sectors such as basic materials, consumer staples, energy and finance are part of the index. These companies include Amazon (AMZN), Visa (V), JP Morgan (JPM) and Apple (AAPL).
This ETF has an expense ratio of 0.03% and AUM of $1.3 trillion. It has a 52-week low of $193.98 and a 52-week high of $242.92. Vanguard Total Stock Market ETF has an annual dividend yield of $0.85970 per share. It has high liquidity and trades more than 1.5 million shares per day. VTI has a 1-year return rate of 25.64%, a 3-year return rate of 25.76% and a 5-year return rate of 17.97%.
Invesco S&P 500® Equal Weight ETF (NYSEARCA: RSP)
Invesco S&P 500® Equal Weight ETF has been open to trade since 2003. It tracks the S&P Equal Weight Index and has holdings in over 500 companies. The index contains companies from industrial sectors such as IT, healthcare and finance. These companies include Alexion Pharmaceuticals (ALXN), NortonLifeLock (NLOK) and PayPal (PYPL).
This ETF has an expense ratio of 0.20% and AUM of $17,590 million. It has a 52-week low of $69.71 and a 52-week high of $127.17. Invesco S&P 500 Equal Weight ETF has an annual dividend yield of $2.09 per share. It has high liquidity and trades more than 2.5 million shares per day. RSP has a 1-year return rate of 10.70%, a 3-year return rate of 31.36% and a 5-year return rate of 81.09%.
Vanguard S&P 500 ETF (NYSEARCA: VOO)
Vanguard S&P 500 ETF has been on the market since 2010. It tracks the S&P 500 and consists of over 500 U.S. companies. The index contains companies from industrial sectors such as communication services, consumer discretionary and healthcare. These companies include Mastercard (MA), Amazon (AMZN), Home Depot (HD) and UnitedHealth Group (UNH).
This ETF has an expense ratio of 0.03% and AUM of $177,610. It has a 52-week low of $340.45 and a 52-week high of $439.25. Vanguard S&P 500 ETF has an annual dividend yield of $1.53290 per share. It has high liquidity and trades more than 916,564 shares per day. VOO has a 1-year return rate of 17.17%, a 3-year return rate of 20.67% and a 5-year return rate of 14.84%.
Best Online Brokers for Index Funds
Check out the recommended brokers below to get started with index funds.
Index Funds for the Win
If there’s one takeaway, just remember that passively managed index funds can beat managed funds over time. The best performing index funds are not necessarily stacked with brokers, fancy slogans and a mission statement longer than the tax code. If you’re interested in finding the best financial tools to hold for the long term—that won’t eat up your money through expenses—seriously consider index funds for your portfolio.
Explore More: BEST ONLINE BROKERS FOR INDEX FUNDS