Prior to the early 1970s, if you wanted to invest in the stock market, you had to visit a stockbroker and buy shares in an individual company. Upon its founding in 1976, Vanguard forever changed the market when it launched its first index fund, called the Vanguard 500 Index (VFINX).
An index fund buys all, or a representative sample, of the securities in a specific index — like the Standard & Poor’s 500 index — instead of hiring pricey fund managers to select which stocks or bonds the fund will hold. Today, scores of Vanguard index funds exist along with many others from a number of investment firms. Here are the nine top index funds to consider and what you need to know to start investing in them today
Why You Should Invest in Index Funds
Index funds were created to match market benchmarks, meaning the unmanaged group of securities’ performance that is a standard by which to measure an investment fund’s performance. For example, the Russell 3000 index is one benchmark for the entire U.S. stock market. The goal of an index fund is to track the performance of a specific market benchmark as closely as possible. Index funds are popular because their returns typically beat those of the most actively managed mutual funds. Some of the best mutual funds to invest in are index funds.
How to Invest in Index Funds
You might be wondering which side to choose in the battle of index fund vs. ETF. Most index funds are varieties of mutual or exchange-traded funds — both of which provide market-matching returns, low fees and diversification.
When you’re ready to invest, open a brokerage account, select the fund and number of shares you want and click “buy.” Review these nine index funds so you can better decide which to choose.
1. Vanguard Total Stock Market Index Fund (VTSMX)
Created in 1992, this fund offers exposure to small and large companies spanning the U.S. investment markets. If you choose VTSMX, you’ll gain exposure to value and growth companies. It features a low, 0.15 percent expense ratio for its mutual fund and a 0.04 percent fee for its ETF.
The minimum investment amount is $3,000. If this amount too steep for you, check out Schwab’s Total Stock Market index fund (SWTSX), which doesn’t require a minimum investment amount.
2. Vanguard Dividend Appreciation ETF (VIG)
Investing in companies with a history of increasing dividends gives you an opportunity to create an income stream and capital appreciation because the share value of the underlying company shares increases. VIG’s 0.08 percent expense ratio is tough to beat. And today’s 2.05 percent yield trumps the average return on a savings account.
3. Schwab Small Cap Index Fund (SWSSX)
Buying a small cap fund will give you diversified exposure to the world of smaller companies. The benefit of investing in small cap companies is that smaller firms generally have higher growth potential.
Although SWSSX tracks the Russell 2000 index, it manages to beat the returns of its benchmark, which is quite a feat. Because SWSSX consists of 1,941 stocks that feature a mix of growth and value stocks, it offers excellent diversification across the small company sector.
4. Vanguard Total World Stock Index Fund Investor Shares (VTWSX)
If you can own one stock index fund only, choose VTWSX. It’s a low-cost fund available in an ETF and it provides exposure to the entire global stock market; in addition, it includes stocks from U.S.-developed foreign and emerging markets.
If you have $3,000 to invest in the stock market, this fund will provide you with broad diversification — and it features a reasonable expense ratio of 0.21 percent. Be aware, however, that when you invest internationally, you might experience volatility due to individual country and currency risk. For instance, if Singapore goes through a political upheaval or Mexico devalues its currency, your shares might be affected.
5. Schwab International Index Fund (SWISX)
The best way to figure out how to invest in index funds from abroad is to explore a global fund. SWISX is a good holding to invest in if you want to go global — it features a low, 0.19 percent management fee and a high, 2.96 percent yield. In addition, its minimum investment amount of $100 is ideal for beginning investors.
6. iShares Core U.S. Aggregate Bond ETF (AGG)
Bonds are an important part of a diversified investment portfolio. AGG tracks the results of the total U.S. investment grade bond market and has a 0.06 percent expense ratio.
For a low management fee, you’ll gain broad bond exposure and add fixed income assets to your investment portfolio. With more than 6,000 bonds in the fund, your portfolio won’t be devastated if a bond defaults.
7. iShares TIPS Bond ETF (TIP)
You won’t get rich from the iShares TIPS Bond ETF, but you can protect your money from inflation. Treasury Inflation Protected Securities are government bonds designed to increase in value as inflation rises.
TIPS consist of 37 individual bonds with various maturities — this diversification will help protect your purchasing power from the ravages of inflation. The 0.20 percent expense ratio is a reasonable fee to pay for that protection.
8. Vanguard REIT ETF (VNQ)
The largest REIT fund, VNQ, invests in real estate-related companies’ stocks. VNQ owns shares in companies that buy office buildings, hotels and a variety of types of real estate.
For a small investment, you’ll gain access to the broad U.S. real estate market, and the low, 0.12 percent expense ratio makes this fund a keeper.
Fidelity index funds include the Real Estate Index mutual fund (FRXIX), which comes with a 0.23 percent management fee and top holdings that include Simon PPTY Group (SPG), Public Storage (PSA) and Prologis Inc (PLD).
9. ProShares Short S&P 500 ETF (SH)
If you think the market is ready to take a tumble, this inverted index ETF is for you. Comprised of large cap U.S. equities, it seeks to profit from a decline in the S&P 500.
If you’re an experienced investor and you’re comfortable with extreme risk, SH might be a good investment for you. If you like technology and want to capture the returns of the top 100 Nasdaq firms, consider investing in Powershares QQQ.
Keep Reading: ETF vs. Mutual Fund: How to Choose Your Investments