Best Index Funds of 2023 and Beyond
Are you thinking about investing in index funds? You may have heard about the popularity of this type of investment. Now you want to know about the best index funds in the market.
An index fund is a type of investment that tracks a specific index, allowing people to pool their money and then invest it in various securities, such as the S&P 500 or the Dow Jones Industrial Average.
Index funds are passive investments, which means they aim to track the performance of the underlying index.
Many investors go for index funds since they offer lower risk and greater diversification at a low cost. This article provides a short overview and a list of the top index funds you could add to your portfolio.
Why Invest in Index Funds?
Index funds offer several advantages to investors:
- They provide broad exposure to a wide range of stocks, which can help to diversify a portfolio and reduce risk.
- They tend to be lower-cost than actively managed funds, which can save investors money over time.
- They produce lower tax outcomes than other types of investments, which can save investors money on their taxes. That’s because, with index funds, you will buy and sell less, which means fewer taxable capital gains.
- Index funds offer the utmost convenience in understanding and managing, which can be a good move when you’re just starting investing.
These advantages make index funds an attractive option for investors looking to keep things simple or want to avoid high fees.
Index Funds vs. Managed Funds
Both have pros and cons, so evaluating the difference is critical before making a final decision.
Index funds track a specific index; the S&P 500, for instance. Therefore, they require less time and effort to maintain than actively managed funds.
With an actively managed fund, the fund manager constantly buys and sells to try and outperform the market. As a result, index funds tend to contain lower fees than actively managed funds.
These managed funds can offer the potential for higher returns if the fund manager is successful. But there's also a higher probability of losses associated with it, and fees are typically higher.
If you're looking for the potential for high returns with a higher risk, then an actively managed fund may be a good choice. But if you're more focused on preserving capital and building wealth, then an index fund may be a better option.
How Do Index Funds Work?
Index funds are typically structured as mutual or exchange-traded funds (ETFs). Both index funds aim to track the performance of a specific index, but they differ in a few key ways.
Typically, mutual funds are administered by fund managers who buy and sell stocks to track the underlying index. ETFs, on the contrary, are passively managed and targeted to replicate the index's performance.
Both types of index funds have their benefits and drawbacks. For example, mutual funds relatively impose higher fees than ETFs. But ETFs can be more difficult to trade and may be subject to greater market volatility.
15 Best Index Funds
These index funds offer exposure to different segments of the US stock market and can be used to construct a diversified portfolio. Choose one or more of these funds to include in your portfolio, depending on your investment objectives and risk tolerance.
1. Vanguard S&P 500 Index Fund
VOO tracks the S&P 500 index and has an expense ratio of 0.03%, and it has returned an average of 11.8% per year over the past ten years.
2. SPDR S&P 500 ETF
SPY tracks the S&P 500 index with an expense ratio of 0.09%. It is the largest US ETF, with over $300 billion in assets.
When you’re looking for a similar fund with another investment company, FXAIX is a Fidelity fund that may be the right choice for you. SPY and FXAIX are funds that track the same index and offer low fees.
3. Vanguard Total Stock Market Index Fund
VTSAX tracks the MSCI US Broad Market Index, which includes all US stocks. The fund has an expense ratio of 0.04% and has returned an average of 13.4% per year over the past ten years.
4. Vanguard Russell 2000 ETF
VTWO tracks stocks in the Russell 2000 Index, mainly made up of stocks of small US companies. It has a 0.01% expense ratio.
5. Fidelity Total Market Index Fund
FSKAX currently has the lowest index funds expense ratio at 0.015%. It tracks the Dow Jones US Total Stock Market Index.
FSKAX is similar to FZROX, another Fidelity total stock market fund. FSKAX and FZROX are diversified funds with extremely low costs; FZROX even offers zero fees.
6. Vanguard 500 Index Fund
The VFIAX tracks the S&P 500, a general benchmark for the stock market. It's a good option for investors who want to diversify their portfolios and get exposure to various companies. It has an expense ratio of 0.04%.
7. Schwab S&P 500 Index Fund
The SWPPX fund tracks the S&P 500 and has a low fee of 0.02%. That makes it a good choice for investors who want to keep their costs down.
8. iShares Core S&P 500 ETF
IVV is an iShares fund that tracks the S&P 500 and is one of the most popular index funds in the market. It's a good choice for investors who want a simple, low-cost way to invest in the stock market.
If you want a similar fund with another company, VOO is a fund by Vanguard that may be the right choice. IVV and VOO are funds that track the same index and offer low fees.
9. Vanguard Total Stock Market Index Fund
The VTSMX tracks the performance of the entire stock market, which can provide more diversification than a fund that only tracks the S&P 500. At a 0.14% expense rate, it’s a popular option to have exposure to the total stock market.
10. Schwab Total Stock Market Index Fund
SWTSX tracks the performance of the entire stock market, but it has lower fees than most at 0.03% expense ratio.
11. iShares Core Total US Stock Market ETF
ITOT tracks the MSCI US Broad Market Index and has an expense ratio of 0.03%. It is one of the cheapest and biggest US ETFs, with over $20 billion in assets. This ETF tracks the performance of the entire US stock market and can be a good choice for investors who want broad diversification.
When you want a fund similar to ITOT but with another investment company, VTI is a fund with Vanguard that may be something to look into. ITOT and VTI are total market ETFs that focus on the US market and have very low costs.
12. Vanguard S&P 500 Growth Index Fund
The VOOG tracks the S&P 500 Growth Index, which includes companies expected to grow faster than the overall market. It's a good choice for investors who want to focus on growth stocks.
13. Schwab US Large-Cap Growth Index Fund
SWLGX tracks the Russell 1000® Growth Index, which includes more companies than the S&P 500. With a fee of 0.035%, your total investment costs will be on the lower side.
14. iShares S&P 500 Growth ETF
IVW tracks the S&P 500 Growth Index and is an excellent choice for investors who gravitate more toward growth stocks.
15. Vanguard Dividend Appreciation Index Fund
VDAIX tracks the Dividend Achievers Index, which includes companies with a history of paying dividends. As a result, it's an ideal choice for investors who are more inclined toward income-producing stocks.
Frequently Asked Questions (FAQs) – Best Index Funds
What Index Fund Has the Highest Return?
When picking the index fund with the highest return, there is no easy answer. However, there are a couple of things investors should consider when making this decision.
First, it is imperative to remember that past performance is not necessarily indicative of future results. Second, fees and expenses can significantly impact returns, so it is important to compare these factors before making a final decision. Finally, it is also important to consider your individual investment goals and risk tolerance when choosing an index fund.
What Is the Rate of Return on Index Funds?
The rate of return on index funds is how much your money grows annually.
The rate of return on index funds will vary depending on the specific fund and the market conditions at the time. However, over the long term, index funds have tended to outperform actively managed funds.
Additionally, index funds typically have lower fees than actively managed funds, contributing to higher returns.
Are S&P 500 Index Funds a Good Investment?
S&P 500 index funds are a type of mutual fund with a portfolio constructed to match or track the components of the S&P 500 Index, an American stock market index. The advantage of investing in an S&P 500 index fund is that it offers investors broad exposure to large-cap US stocks in a single investment.
Additionally, because the S&P 500 index is highly diversified, it can help to reduce risk. However, it is important to remember that index funds do not offer guaranteed returns, and their performance will depend on the performance of the underlying index.
For these reasons, S&P 500 index funds can be a good investment for long-term investors seeking diversification and potential capital appreciation.
Conclusion – Best Index Funds
The list of options can be considered the best index funds currently available in the market. These funds are good choices, especially for passive investors looking for a long-term investment.
Investing in one (or more) of these will allow you to spend less time choosing stocks and diversify your portfolio while spreading the risk, generally at a lower cost.
Before investing your hard-earned money, do more thorough research on the companies and funds, picking the best one that suits your investment goals and preferences.
This post originally appeared on Hello Sensible.
Marjolein is the founder of Radical FIRE. She has a finance and economics background with a master’s in Finance. Radical FIRE is a personal finance blog that helps you live your dream life through making more money and investing. We want you to reach your financial goals and have fun while doing it!