Picking individual stocks can be risky, so most investors want a safer option. Index funds consist of a variety of stocks, helping you lower risk through diversification. They’re the best option for new investors learning the market and seeking lower fees than actively managed funds. Index funds are passive investments, making them suitable for busy investors who don’t constantly keep an eye on the market. But investing in just any index fund doesn’t guarantee profits. Some index funds are riskier than others, so Benzinga compiled a list of the best safe index funds.
Quick Look at the Best Safe Index Funds:
- Fidelity ZERO Large Cap Index Fund
- Vanguard S&P 500 ETF
- Schwab S&P 500 Index Fund
- SPDR S&P 500 ETF Trust
- Vanguard Russell 2000 ETF
The Best Safe Index Funds
Choosing a safe index fund means investing in one aligned with your goals. The main reasons investors opt for index funds are low annual costs, low volatility and satisfactory returns.
Analyzing all index funds that meet that criteria is time-consuming, so Benzinga made your search easier by identifying index funds that’ll help you achieve your investing goals.
1. Fidelity ZERO Large Cap Index Fund
Fidelity ZERO Large Cap Index Fund (NASDAQ: FNILX) became popular with investors because of its zero expense ratio. The index aims to provide results that correspond to the returns of stocks of large-capitalization U.S. companies.
It doesn’t track the S&P 500 index fund, but it follows the Fidelity U.S. Large Cap Index. The key advantage for investors is they don’t have to pay the annual licensing fee to use the S&P name. Another benefit of this index is that it doesn’t have a minimum investment amount. That’s perfect for beginner investors who don’t have much money or don’t want to risk significant amounts.
2. Vanguard S&P 500 ETF
Investors wanting a fund that tracks the S&P 500 will find the Vanguard S&P 500 ETF (NYSEARCA: VOO) alluring. Not only is this one of the largest funds in the market, it has a low expense ratio. You’ll pay 0.03% for every $1,000 invested — $0.30.
The goal of this exchange-traded fund (ETF) is to provide similar returns to that of the S&P 500 by minimizing risk and ensuring low costs. Considering Vanguard is an investment powerhouse, investors flock to this index because Vanguard backs it.
3. Schwab S&P 500 Index Fund
The Schwab S&P 500 Index Fund Select Shares (NASDAQMUTFUND: SWPPX) aims to replicate the total return of the S&P 500. It provides access to 500 leading U.S. companies and captures about 80% coverage of U.S. market capitalization.
The fund’s attractive feature is the low cost — only 0.02% annual cost. This index fund also doesn’t have a minimum investment amount. It started in 1997 and provided almost identical returns to the S&P 500 in 2021. Charles Schwab Corp. sponsors this index fund.
4. SPDR S&P 500 ETF Trust
The SPDR S&P 500 ETF Trust (NYSEARCA: SPY) is one of the most popular funds that tracks the S&P 500. It started in 1993 and helped pave the way for the rising popularity of ETF investing. The fund’s expense ratio is 0.095%.
The fund consists of hundreds of billions of dollars, and State Street Global Advisors sponsors it. SPDR uses the S&P 500 as a benchmark, seeking to mirror its returns before expenses. It has one of the largest daily trading volumes in the ETF market and distributes dividends quarterly, based on accumulated stock dividends in the trust - less expenses.
5. Vanguard Russell 2000 ETF
If you’re interested in investing in small publicly-traded U.S. companies, the Vanguard Russell 2000 Index Fund ETF (NASDAQ: VTWO) is ideal. The fund tracks the Russell 2000 and provides exposure to investors seeking significant growth potential in small companies.
The fund’s investments consist of slightly more than 2,000 small and medium companies. You’ll incur an annual expense ratio of 0.10%. But you’ll receive a quarterly cash dividend of Class A common stock.
It’s mostly suitable for investors with long-term goals because its share value is more volatile than funds holding bonds. This index fund is largely made up of healthcare, industrial and financial stocks.
What is an Index Fund?
An index fund is an exchange-traded fund or a mutual fund consisting of a portfolio of investments in large or small companies. It follows a benchmark index, such as the S&P 500 or Nasdaq-100, aiming to mirror their returns for investors.
Investing in an index fund means that your cash is invested in all the companies that make up an index. That diversifies your portfolio, helping you minimize risk. Index funds are passively managed, so investors pay lower costs than they would for actively managed funds.
Index funds usually have a good track record because they track stock market indexes proven to provide good returns. The goal of mutual funds is to beat the market, hence they tend to be actively managed. Index funds aim to match the market’s performance, making them an ideal portfolio holding for individual retirement accounts (IRAs) and 401(k)s.
What to Look for in an Index Fund
Investing in an index-tracking fund doesn’t guarantee profits, and you need to consider several factors to ensure a fund is safe. Even if an index fund has a solid record of tracking successful indexes, certain factors may diminish returns.
Some of the key aspects to look at when investing in an index fund:
Expense ratio: An expense ratio is a percentage of your investment paid annually for fund management. The fee varies across different investment houses. Some funds, such as the Fidelity ZERO Large Cap Index, have a zero expense ratio. Although ideal, that ratio is not common.
Some funds have an expense ratio of 0.20% and higher. But an index fund with a good expense ratio is 0.1% or less. Funds that have a high expense ratio significantly lower your returns. And in some cases, they can cause you to incur a loss in a particular year if the index fund’s performance was poor.
Investment goals: Before deciding which index fund to invest in, you need to determine your investment goals. Knowing your expected returns and management fees you can afford will help you determine whether an index fund is aligned with your goals.
Certain index funds track companies with volatile stock prices while others target companies issuing reliable dividend payments.
Minimum required investment: Certain brokers stipulate a minimum amount you need to invest in an index fund. If required, the most common investment is $1,000 or more. Many of the safest index funds have no minimum investment amount.
That’s beneficial to investors with little cash or beginners who don’t want to risk significant amounts. Some ETF brokers offer fractional shares — owning a fraction of a share by investing less money than the cost of a single share.
Target market segment: Determine the particular market that your index fund targets. Some funds invest only in U.S. companies while others target specific industries and countries.
How Do Index Funds Affect Your Portfolio?
You need to determine whether investing in an index fund is aligned with your investment goals. Investing in index funds affects your portfolio in several ways.
Lowers risk: Some index funds consist of hundreds of securities, across various industries and countries. Spreading your risk among numerous companies helps you offset losses with profitable company stocks.
Lower fees: Index funds are passive investments, tracking a particular stock market index. They require minimal effort from fund managers, so investors save money from lower fees than actively managed funds.
Limits profits: Fund managers build an index fund that mirrors and tracks a popular stock market index, so profits usually mimic funds such as S&P 500 and Nasdaq-100. That’s a safe haven for investors looking for long-term growth.
While an index fund usually provides single- or double-digit annual profits, some individual stocks have risen hundreds or thousands of percent.
Compare Online Brokers for Index Funds
Benzinga has made investing in an index fund easy by selecting the best online brokers.
Frequently Asked Questions
What is the safest index fund?
The safest index fund offers a zero expense ratio and tracks a stock market index proven to provide consistent profits. Benzinga discovered that Fidelity ZERO Large Cap Index doesn’t track the S&P 500 index fund, but it follows the Fidelity U.S. Large Cap Index. That lowers your annual cost because you don’t have to pay a licensing fee to use the S&P name, but you benefit from tracking an index that provides good returns.
Which indices do ETFs track?
Indices can track the overall market, such as the 500 companies with the largest U.S. market capitalization, making up the S&P 500. Those companies are in various industries, but some indices target small-cap stocks or securities in particular industries or countries.
What are the best safe index funds?
Check out Benzinga’s list in the article above of the best safe index funds.