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Best Index Funds

Index funds offer small investors access to low-cost, diversified portfolios. They’re so hands-off that your money will automatically grow in a well-chosen index fund for the long haul. That’s the luxury of passive investing.

Quick Look: The Best Index Funds 

  • Vanguard Total Stock Market Index (VTSMX)
  • Fidelity Total Stock Market Index (FSTMX)
  • Vanguard S&P 500 ETF (VOO)
  • Schwab U.S. Small-Cap ETF (SCHA)
  • Vanguard High Dividend Yield ETF (VYM)

Start investing in index funds.

An index fund is a type of mutual fund or ETF portfolio that tracks a broad segment of the U.S. stock market.

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. 

Pros and cons of index funds

The pros and cons of index funds should be carefully considered before you zip online and buy one.

Pros

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.

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.

Cons

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.

Take a quick look at some of our favorites below.

Broker Best For Commissions Account Minimum Choose your platform
Ally Investment
  • Active traders
  • Beginners looking to start trading
  • Low fees
$0 $0
Get started securely through Ally Investment's website
1 Minute Review

If investors are on the hunt for a bargain broker, Ally Invest could be the one. With low commissions across the board, Ally Invest (formerly TradeKing) stops potential investors in their tracks with its especially low mutual fund commissions. Commissions on stocks and ETFs are notoriously inexpensive as well, and for more active traders or those with larger account balances, commissions can dip as low as $3.95 per trade.

Pros
  • Volume discounts available
  • Among the lowest fees in industry
  • Good for every experience level
  • Excellent customer service
Cons
  • Lacks physical locations
Current Promotion

$3.95 per stock trade for Active Traders at Ally Invest

eTrade
  • Mobile traders
  • Traders looking for research and data
  • Investors looking for retirement planning guidance
$0 $0
Get started securely through eTrade's website
1 Minute Review

E-Trade is best known for its user-friendly browser, desktop and mobile trading platforms and its extensive research and educational information. E-Trade may not have the lowest commissions compared to discount online brokers, but customers certainly get their money’s worth from E-Trade’s comprehensive offerings.

Pros
  • Extensive resources
  • Full banking services
  • Easy-to-use platforms
Cons
  • Limited access to ETrade Pro
  • Higher commissions than discount brokers
Current Promotion

60 days of commission-free trades with deposit of $10,000 or more

Interactive Brokers
  • Forex traders
  • Professional traders
  • Frequent traders with a thirst for different order types (63!)
$0.005 per share minimum $1 and maximum 0.5% of trade value; volume discount available $0 for cash account, or a margin account with $2,000
Get started securely through Interactive Brokers's website
1 Minute Review

If you consider yourself a sure-footed professional trader, Interactive Brokers might be a major possibility for you, particularly if you’re adept at navigating tricky trading platforms (can you say 124 option indicators?) or have done more than just dipped your toe a “coupla times” into the complex world of international markets.

Pros
  • If you’re into trading on margin, you’re in luck. Interactive Brokers offers the lowest rates in the industry.
  • Low pay-per-share commissions on stock trades (up to 1,000 shares) and on options trades (up to 20 contracts)
  • Vast order types options for professional traders
Cons
  • Interactive Brokers charges account fees (including annual, transfer, closing an inactivity fees) and offers an extremely complex trading platform
Current Promotion

Lower minimum activity requirements ($3/month) and opening account minimum requirement ($3,000) for clients 25 and younger.

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

Benzinga has compiled a list of a few of the best index funds, and they include the following:

Vanguard Total Stock Market Index (VTSMX)

YTD return: 15.70%
5-year return: 9.71%
Expense ratio: 0.14%

Fidelity Total Stock Market Index (FSTMX)

YTD return: 2.34%
5-year return: 10.71%
Expense ratio: 0.02%

Vanguard S&P 500 ETF (VOO)

YTD return: 14.46%
5-year return: 9.63%
Expense ratio: 0.03%

Schwab U.S. Small-Cap ETF (SCHA)

YTD return: 14.96%
5-year return: 6.55%
Expense ratio: 0.04%

Take a look at some of Benzinga’s picks for the best Schwab index funds.

Vanguard High Dividend Yield ETF (VYM)

YTD return: 11.14%
5-year return: 8.04%
Expense ratio: 0.06%

Final thoughts

If there’s one takeaway, just remember that passively managed index funds can beat managed funds over time. If you’re interested in finding something you’d like to hold for the long term and won’t eat up your money through expenses, seriously consider index funds for your portfolio.

Want to learn more about investing? Check out Benzinga’s guides to the best online brokerages, best individual retirement accounts (IRAs) and best Roth IRAs.

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