Best Index Funds February 2021: How To Invest

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An index fund is a type of mutual fund that either buys all or a representative sample of securities in a specific index, such as the S&P 500. Instead of being actively managed by fund managers, index funds are passively managed. This style of management helps lower fees and expenses.

Like all mutual funds, index funds can add diversification to your portfolio because they invest in thousands of different stocks, often across a wide range of industries.

What Are the Best Index Funds for 2021?

Scores of index funds are available to investors these days, from several different brokerage firms. Here are the nine top funds to consider and what you need to know to start investing in the best index funds.

1. Vanguard Growth Index Fund Admiral Shares (VIGAX)

Vanguard’s Growth Index fund invests in stocks that operate in fast-growing market sectors. Its focus on large-capitalization U.S. growth stocks makes it riskier than other funds on this list, but it also has greater return potential.

  • Minimum investment: $3,000
  • Expense ratio: 0.05%
  • Management fees: $20 annual service fee may apply if certain requirements are not met
  • Five-year average return: 20.32%
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2. Fidelity NASDAQ Composite Index (FNCMX)

This fund tracks the performance of the Nasdaq Composite Index and includes major positions in several technology stocks. It carries a higher-than-average risk but has delivered strong returns over the years.

  • Minimum investment: $0
  • Expense ratio: 0.29%
  • Management fees: $0
  • Five-year average return: 24.22%

3. Fidelity 500 Index (FXAIX)

Fidelity might be one of the best index funds for beginners because of the resources it provides customers, including tools that offer investment advice and research. Founded in 1988, its 500 Index fund is a balanced fund that invests at least 80% of assets in S&P 500 stocks.

  • Minimum investment: $0
  • Expense ratio: 0.015%
  • Management fees: $0
  • Five-year average return: 16.15%

4. Vanguard Total Stock Market Index (VTSAX)

The aim of Vanguard’s Total Stock Market Index Fund is to give investors exposure to all U.S. equities, including small-, mid- and large-cap growth and value stocks. This is an excellent fund if you want a diversified investment in a broad range of companies and markets.

  • Minimum investment: $3,000
  • Expense ratio: 0.04%
  • Management fees: $20 annual service fee may apply if certain requirements are not met
  • Five-year average return: 15.42%
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5. Schwab S&P 500 Index (SWPPX)

Designed to compete directly with Vanguard and Fidelity index funds, the Schwab S&P 500 Index is a low-cost fund with no investment minimum. It invests in 500 of the leading U.S. companies and has exposure to about 80% of U.S. market capitalization.

  • Minimum investment: $0
  • Expense ratio: 0.020%
  • Management fees: 0.02% of investment value
  • Five-year average return: 16.11%

6. Schwab Total Stock Market Index (SWTSX)

The Schwab Total Stock Market Index fund tracks the total return of the U.S. stock market based on the Dow Jones U.S. Total Stock Market Index. It’s a balanced fund with shares of large-cap, mid-cap and small-cap U.S. securities.

  • Minimum investment: $0
  • Expense ratio: 0.030%
  • Management fees: 0.03% of investment value
  • Five-year average return: 16.59%

7. Vanguard Balanced Index Fund Admiral Shares (VBIAX)

Vanguard’s broadly diversified Balanced Index fund offers a low-cost way to invest in a mixture of stocks and bonds, with about 60% in stocks. Investments are chosen so that no single security has a significant impact on the overall fund.

  • Minimum investment: $3,000
  • Expense ratio: 0.07%
  • Management fees: $20 annual service fee may apply if certain requirements are not met
  • Five-year average return: 11.80%

8. Vanguard Mid-Cap Index Fund Admiral Shares (VIMAX)

The original Vanguard Mid-Cap Index is closed to new investors, but an Admiral Shares mutual fund and ETF are available. The fund tracks stocks with more volatility than larger companies, making it better suited to already diversified portfolios.

  • Minimum investment: $3,000
  • Expense ratio: 0.05%
  • Management fees: $20 annual service fee may apply if certain requirements are not met
  • Five-year average return: 14.92%

9. Fidelity Total Bond (FTBFX)

Fidelity’s Total Bond fund is a diversified fund that uses the Bloomberg Barclays U.S. Universal Bond Index as a guide. Its assets are invested in high-yield and emerging market classes, which increases both the risk and potential return.

  • Minimum investment: $0
  • Expense ratio: 0.45%
  • Management fees: $0
  • Five-year average return: 5.43%

Can You Get Rich Off Index Funds?

For most people, index funds are a good long-term investment choice. Investing in index funds is less risky than investing in individual stocks because index funds are designed to track the overall market. As long as the market goes up, so does the index fund. And because the stock market typically increases over time, so do most index funds.

Index funds tend to be balanced in such a way that if one stock in the fund performs poorly, the rest of the stocks can buffer the loss. The downside is, less risk also means less growth potential. You might miss drops in an individual stock’s value, but you also miss out on dramatic increases. This makes it challenging to get rich off of index funds unless you pour a lot of money into them.

How To Invest in Index Funds

When you’re ready to invest, you’ll need to open a brokerage account. Here’s how.

Choose a Brokerage

Most investors now buy index funds online from brokerages like Charles Schwab, Fidelity and Vanguard, though a few traditional brokerages and financial firms are still around that might require an in-person visit. Look for a company with a proven track record and positive reputation. Also, consider what kinds of tools are available to provide advice and resources for managing your portfolio.

Compare Index Funds

There are hundreds of index funds that track different indices and sectors. As you browse the available funds, choose the ones that interest you and compare them.

Here are some metrics to consider when comparing the funds:

  • Allocation
  • Average returns
  • Expense ratio
  • Index
  • Minimum investment
  • Management fees
  • Risk level

Look for funds that align with your financial goals. Index funds are typically less risky than individual stocks, but they’re not risk-free. Make sure you understand the risk level of the funds before you buy them.

Check Costs and Fees

It does cost money to invest in index funds. The expense ratio indicates how much you will pay to own the fund. The greater the expense ratio, the greater the cost. You might also face separate management and service fees.

But cost shouldn’t be the only factor to consider. It’s also important to research the fund’s performance history and tax efficiency. Note how closely the fund mirrors the index it’s supposed to track. Consider pre-tax and after-tax returns.

Is Now a Good Time To Buy Index Funds?

It’s a good time to buy index funds if they fit with your financial goals. Since they track specific market indices, they are affected by the volatility of the stock market.

Most investors choose the best index funds for long-term growth. A financial advisor can help you define your financial goals and decide whether index funds are right for you.

This article has been updated with additional reporting since its original publication.

Data is accurate as of Feb. 16, 2021, and is subject to change.

Our in-house research team and on-site financial experts work together to create content that’s accurate, impartial, and up to date. We fact-check every single statistic, quote and fact using trusted primary resources to make sure the information we provide is correct. You can learn more about GOBankingRates’ processes and standards in our editorial policy.

About the Author

Barbara A. Friedberg, MBA, MS, brings decades of finance and investing experience. She has a Bachelor of Science degree in economics from the University of Cincinnati, a Master of Science degree in administration and counseling from Miami University, and a Master of Business Administration degree in finance from Penn State University. Her work has been featured in U.S. News & World Report, Investopedia, Yahoo! Finance, GOBankingRates, InvestorPlace and many more publications.

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