Index funds are a simple way to shelter yourself from market volatility. For risk-averse investors, this is in an investment vehicle that can keep you in the market while providing reasonable protection for their capital.
Here’s why. Many mutual funds are actively managed. This means you’re paying fees for a fund manager to (hopefully) outperform the broader market. When this works, it’s a glorious thing that you can boast about at your next dinner party (virtual, of course). But when it doesn’t, it can create many anxious moments.
Index funds, by contrast, are passive. Instead of having a fund manager trying to beat the market, the goal is simply to closely proximate the return of the index it follows. This is a reason that index funds have lower fees than many mutual funds, which can lead to a higher total return.
Another reason index funds may belong in your portfolio is because they offer diversification. For example, let’s say you’re a conservative investor who wants some exposure to the tech sector. Investing in an index fund that is tied to a technology stocks index is a conservative way to dabble in the sector without putting too much capital at risk.
Before I give you some index funds that are ideal for any portfolio, let me add a word of caution. Buying into an index fund doesn’t mean you’ll never lose money. But it does suggest that you should be protected from downward price movements that exceed those of the index that you’re targeting.
With that in mind, here are five index funds that belong in any portfolio.
- Vanguard 500 Index Fund Admiral Shares (MUTF:VFIAX)
- Vanguard Information Technology Fund (NYSEARCA:VGT)
- Vanguard Total Stock Market Fund (NYSEARCA:VTI)
- Schwab S&P 500 Index Fund (MUTF:SWPPX)
- SPDR Gold Trust (NYSEARCA:GOLD)
Vanguard 500 Index Fund Admiral Shares (VFIAX)
Year-to-date gain: 11.7%
The Vanguard 500 Index Fund is tied to the S&P 500 index. Founded in 1976, the VFIAX is one of the longest-running index funds. At the time of this writing, the fund is pacing the S&P 500 which has a year-to-date gain of 11.7%.
At the end of October, the fund’s 10 largest holdings comprised 28.9% of its total net assets. The fund’s 52-week average return is 18.36% and it has a return of 94.98% over the last five years. However, achieving this growth does not come without risk. The S&P 500 has had some wild swings this year, and the fund does carry a higher risk than some other index funds.
Unlike many index funds, VFIAX stock does have a minimum investment requirement. In this case, the minimum investment is $3,000. The fund has a low turnover rate of around 4%. The fund’s expense ratio is 0.04% with a yield of 1.77%.
Vanguard Information Technology Index Fund ETF Shares (VGT)
Year-to-date gain: 32.3%
If you want to take on slightly more risk, you could consider the Vanguard Information Technology Index Fund ETF. As its name implies, VGT stock specializes in information technology. The fund is up more than 32% for the year. This is what you would expect from a sector that has remained one of the strongest performers in 2020.
Some of the fund’s largest holdings — with a whopping 332 stocks in the portfolio — among are in the names you also might expect, such as Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT). However it also provides exposure to include payment processing stocks, such as Visa (NYSE:V), Mastercard (NYSE:MA) and PayPal (NASDAQ:PYPL) as well as some of the best performing semiconductor stocks.
At the end of October, the fund’s 10 largest holdings made up of 59% of the fund’s total net assets. The fund has grown more than 190% over the last five years. The fund’s expense ratio is 0.1%. This is well below comparable funds that have an expense ratio of 1.25%.
Vanguard Total Stock Market Index Fund ETF Shares (VTI)
Year-to-date gain: 12.1%
Source: Casimiro PT / Shutterstock.com
Staying in the Vanguard family for just one more fun, I’ll present the Vanguard Total Stock Market Index Fund. As its name suggests, VTI stock provides exposure to the entire stock market. One of the limitations of being in index funds that track a particular index like the S&P 500 is that the fund will have holdings, and weightings, that reflect that index. While that can be very good, it can also present more risk than some investors are more comfortable with.
The VTI fund is a way to smooth out the risk because you own every segment. This diversification includes large-, mid- and small-cap stocks in sectors ranging from financials to utilities to consumer goods. Another benefit to this fund is a low expense ratio of just 0.03%
In addition to the fund’s gain of over 12% this year, it has gained over 70% over the last five years. The fund’s 10 largest holdings — there are 3,550 altogether in the portfolio — comprise 22.76% of the fund’s net assets.
Schwab S&P 500 Index Fund (SWPPX)
Year-to-date gain: 14.05%
Source: Isabelle OHara / Shutterstock.com
The Schwab S&P 500 Index Fund is nearly identical to Vanguard’s VFIAX fund. However with an expense ratio of just 0.02%, SWPPX stock is one of the most attractive funds for investors who are concerned about minimizing their costs. And another advantage for investors is that the fund has no minimum investment requirement.
As for performance, the fund is up about 12.3% for the year and has a five-year return of over 94%. Both of those numbers are nearly identical to that of the Vanguard fund. This goes to demonstrate the importance of fees in deciding on an index fund.
In addition to the FAANG stocks, the SWPPX gives investors exposure to some blue-chip names, such as Johnson & Johnson (NYSE:JNJ) and Procter & Gamble (NYSE:PG). The benefit of this diversification has been on full display this year as stocks like JNJ have outperformed when tech stocks have struggled and vice versa.
The fund’s largest 10 holdings make up just under 28% of the fund’s net assets. Technology stocks, at 24.7% of the portfolio, are the heaviest sector weighting currently, followed by Healthcare.
SPDR Gold Shares (GLD)
Year-to-date gain: 23.02%
In the introduction, I mentioned that index funds are a good way to get exposure into specific market segments. During times of market volatility, gold and other precious metals can be a safe harbor for many investors. That’s where the SPRD Gold Shares exchange-traded fund comes in.
One of the attractive, and unique, features of this fund is that the fund actually holds physical gold. This is markedly different than funds that hold shares in mining companies. What does this mean for your investment? Well, simply put, when the price of gold is rising, GLD stock is a great investment.
However, as you might expect, the opposite is also true. And that is reflected in the fund’s 10-year performance sits at around 3%. Is that a reason for you to stay away from the fund? Certainly not.
Remember, gold is a hedge in any portfolio. For that reason, even though the fund has a relatively high expense ratio of 0.4%, it’s still hard to beat the GLD fund if you want exposure to precious metals with an opportunity to actually own gold bullion.
On the date of publication Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Markoch is a freelance financial copywriter who has been covering the market for over six years. He has been writing for Investor Place since 2019.
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