The world of exchange-traded funds (ETFs) has been growing in popularity over the past few decades.
While there are a seemingly endless number of ETFs for investors to choose from, index funds have emerged as some of the most sought-after thanks in part to their lower fees and wider diversity of stock selection.
Index funds seek to track the return of a broader benchmark like the Dow Jones Industrial Average or a subset of the market such as small-cap growth stocks or healthcare.
Among the most popular is the SPDR S&P 500 ETF Trust (SPY), which tracks the S&P 500 Index and currently has around $600 billion in assets under management.
Why should you invest in index funds?
One reason, writes Kiplinger contributor Coryanne Hicks, is for their low cost.
"Index funds can pull off these rock-bottom fees because they're passively managed, meaning the fund manager doesn't need to do any active research to choose investments for the fund," Hicks writes in her article on why you should invest in index funds. "All she does is copy what the benchmark index does. This enables companies to keep operating expenses low, which translates into lower fees for investors."
Another reason comes from Dan Burrows, senior investing writer at Kiplinger.com. "It's almost impossible to beat the market for any sort of sustained period of time," Burrows writes in his column on why he chooses to invest in index funds over stocks.
"You might get lucky for a year or two; maybe three even. But you are probably not the next Warren Buffett. I know for certain that I'm not."
Echoing this, Princeton finance professor Burton Malkiel told CNBC in a January 2023 email interview that "Standard & Poor's publishes annual reports showing how actively managed funds compare with index funds. Each year about two-thirds of active managers underperform an index fund."
Malkiel is best known for his investment classic, A Random Walk Down Wall Street. Last year, Malkiel released an updated 50th-anniversary edition of his book, which is considered one of the most influential pieces of writing on index funds.
What's more, index funds offer diversification. "They can include hundreds or even thousands of stocks or bonds across a range of sectors and sizes," Hicks writes. "Diversification reduces the risk of any one stock derailing your portfolio's performance."
Here are 9 of the best index funds to buy for various financial goals. This is a wide selection of the best ETFs and mutual funds that investors can choose from, including those with exposure to large-cap stocks, technology and international firms.
Data is as of October 28. Dividend yields represent the trailing 12-month yield, which is a standard measure for equity funds.
Vanguard Dividend Appreciation ETF
- Type: Large blend
- Assets under management: $86.1 billion
- Dividend yield: 1.7%
- Expenses: 0.06%, or $6 annually for every $10,000 invested
When it comes to the best index funds, the Vanguard Dividend Appreciation ETF (VIG, $197.70) is an excellent choice if you value safety and income growth.
The fund tracks the performance of the S&P U.S. Dividend Growers Index, a group of the best dividend stocks that have increased their annual dividend payments for 10 consecutive years.
Only regular quarterly cash dividends are considered for inclusion. Special cash payouts and stock dividends are excluded. To be considered for the index, a stock must have a three-month median daily value traded of $1 million. Existing stocks have a $500,000 minimum. Holdings are capped at a 4% weighting each.
VIG currently holds more than 300 stocks, with about 82% large caps. The rest are primarily mid-cap stocks and a tiny sliver of small caps. The median market cap is $195.79 billion. The average five-year earnings growth rate for stocks in the Vanguard Dividend Appreciation ETF is 11.8%, with price-to-earnings (P/E) and price-to-book (P/B) ratios of 25.9 and 4.9 times, respectively.
The ETF's top 10 holdings account for 30% of its net assets. Currently, the top three holdings by weight are blue chip stocks Apple (AAPL), Microsoft (MSFT) and Broadcom (AVGO), while the largest sector exposure is found in technology (24%), financials (20%) and healthcare (16%). U.S. stocks account for 99% of the portfolio.
The Vanguard Dividend Appreciation is also part of the Kiplinger ETF 20, a list of our favorite low-cost exchange-traded funds. Additionally, VIG is available as a mutual fund (VDADX) with a $3,000 minimum investment and an 0.08% expense ratio.
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ProShares S&P 500 Dividend Aristocrats ETF
- Type: Large value
- Assets under management: $12.5 billion
- Dividend yield: 2.0%
- Expenses: 0.35%
Another one of the best index funds for income investors is the ProShares S&P 500 Dividend Aristocrats ETF (NOBL, $105.46), which, as you can tell by the name, tracks the performance of the S&P 500 Dividend Aristocrats Index.
The S&P 500 currently includes 67 Dividend Aristocrats, defined as companies that have increased their annual dividends for at least 25 consecutive years.
The index contains a minimum of 40 equally weighted stocks, with no sector accounting for more than 30%. It is reconstituted yearly in January and rebalanced four times in January, April, July and October.
NOBL invests in all 67 eligible stocks. The weighted average market cap of the index fund is $102.5 billion, with P/E and P/B ratios of 22.8 and 3.9 times, respectively.
The top two sectors by weighting are consumer staples (24.2%) and industrials (23.3%), followed by materials stocks (12%), healthcare (10.4%) and financials (10.3%). The U.S. accounts for 93.6% of the portfolio, with the U.K. (3.2%), Ireland (1.6%) and Switzerland (1.6%) accounting for the rest.
The fund's five-year annualized total return (price plus dividends) is 10.7%, trailing both the S&P 500 and its large-cap value peers.
Morningstar gives NOBL a four-star ranking for its performance over the past five years.
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Vanguard High Dividend Yield ETF
- Type: Large value
- Assets under management: $59.7 billion
- Dividend yield: 2.8%
- Expenses: 0.06%
The Vanguard High Dividend Yield ETF (VYM, $129.30) is among the lowest-cost index funds for investors seeking high yields but not high risk.
The fund tracks the performance of the FTSE High Dividend Yield Index – a portfolio of more than 500 stocks ranked by their forecast dividends for the next 12 months and weighted by their market cap.
The ETF currently holds 537 stocks, in line with the index. Top 10 holdings account for 25% of its $46.8 billion in total net assets, with Broadcom, JPMorgan Chase (JPM), Exxon Mobil (XOM), Procter & Gamble (PG) and Home Depot (HD) at the top of the list.
VYM is also reasonably balanced from a sector perspective, with five double-digit weightings – financials (20.8%), industrials (12.8%), healthcare (11.8%), consumer staples (11.1%) and consumer discretionary (10.4%).
The typical holding has a median market cap of $148.6 billion, a five-year earnings growth rate of 10.6%, and P/E and P/B ratios of 19.9 and 2.8 times, respectively. Average return on equity is a healthy 17.6%.
VYM maintains an ultra-low 0.06% expense ratio – a fraction of the average 0.91% expense ratio for the large-cap value category. The fund further benefits from a low 6% turnover.
The Vanguard High Dividend Yield ETF has earned four stars from Morningstar for the three-year, five-year, and 10-year periods. It is available as a mutual fund (VHYAX) with a $3,000 minimum and a slightly more expensive expense ratio of 0.08%.
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WisdomTree U.S. MidCap Dividend ETF
- Type: Mid-cap value
- Assets under management: $3.8 billion
- Dividend yield: 2.3%
- Expenses: 0.38%
The WisdomTree U.S. Midcap Dividend Fund (DON, $51.49) is one of the best index funds for investors seeking exposure to mid-cap, dividend-paying stocks.
The ETF tracks the performance of the WisdomTree U.S. MidCap Dividend Index.
Unlike market cap-weighted and equal-weighted indexes, the WisdomTree U.S. MidCap Dividend Index is fundamentally weighted, comprising the WisdomTree U.S. Dividend Index, excluding the 300 largest companies.
Each company is weighted annually by taking the most recent quarterly payment, multiplying it by four, and then dividing that amount into the total dividends for all the constituents. As a result, both the index and the ETF have 330 holdings.
Investors often overlook mid-cap stocks because they're considered less stable than large caps and possess fewer growth prospects than small caps. The reality is that they are located in the "sweet spot" between the two.
DON is quite diversified. Its top 10 holdings account for less than 11% of its $3.8 billion in net assets. The top holding is electric and gas utility Vistra (VST), followed by retirement and insurance services provider Corebridge Financial (CRBG). Other holdings include Packaging Corp of America (PKG) and International Paper (IP).
From a sector perspective, the three largest weightings are financials (26.2%), industrials (16.8%) and consumer discretionary stocks (11%).
While DON is considered a mid-cap fund, as mid caps account for more than 46% of total holdings. Large caps make up a little more than 53%, with small caps absorbing the rest.
In addition, approximately 67% of the WisdomTree U.S. Midcap Dividend Fund's holdings are value stocks, about 2% are growth stocks and 31% represent a blend.
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Schwab US Small-Cap ETF
- Type: Small blend
- Assets under management: $18.2 billion
- Dividend yield: 1.3%
- Expenses: 0.04%
The Schwab US Small-Cap ETF (SCHA, $25.96) tracks the performance of the Dow Jones U.S. Small-Cap Total Stock Market Index, a subset of the Dow Jones U.S. Total Stock Market Index.
The small-cap index includes the components ranked No. 751 through No. 2,500 by full market capitalization. As a result, it provides investors with a low-cost way to invest in small-cap stocks.
SCHA was launched in November 2009. It has around 1,750 holdings, with a portfolio turnover of 12%. The P/E and P/B ratios are 15.4 and 1.9 times, respectively.
The weighted average market cap of the ETF's holdings is $4.6 billion, and approximately 67% of its holdings have a market cap between $3 billion and $15 billion. Another 25% are between $1 billion and $3 billion, with a little more than 7% allocated across holdings with market caps below $1 billion.
The top three sectors by weighting are financials (16.7%), industrials (16.2%) and healthcare stocks (14.2%). The top 10 holdings account for less than 3% of its $18.2 billion in net assets.
Included at the top of the list are vaccine-focused biotech Vaxcyte (PCVX), nuclear power equipment and component manufacturer BWX Technologies (BWXT) and mobile learning platform operator Duolingo (DUOL) as well as financial services firms Stifel Financial (SF) and Affirm Holdings (AFRM).
The ETF's annualized return since its November 2009 inception is 11.6%, slightly better than the S&P 500's 10.6% annualized return over the same time frame.
SCHA completed a 2-for-1 share split on October 10, increasing the number of shares outstanding and decreasing net asset value per share but not changing the total value of a shareholder's' investment.
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SPDR Portfolio S&P 1500 Composite Stock Market ETF
- Type: Large blend
- Assets under management: $9.3 billion
- Dividend yield: 1.3%
- Expenses: 0.03%
The SPDR Portfolio S&P 1500 Composite Stock Market ETF (SPTM, $70.85) tracks the performance of the S&P Composite 1500 Index. The S&P Composite 1500 combines the S&P 500, S&P MidCap 400, and S&P SmallCap 600, creating a one-stop shop for almost the entire U.S. stock market.
SPTM, meanwhile, uses a sampling strategy, which means it doesn't have to buy all of the stocks in the index; it only has to replicate its performance.
State Street launched the ETF in October 2000. It currently has 1,510 holdings. The average stock has estimated earnings growth of 14.6% for the next three to five years. It also has an average P/E ratio of 26.6, a P/B ratio of 4.4 and a weighted average market cap of $968.1 billion.
Its top 10 holdings account for around 33% of its $9.3 billion net assets and include mega-cap stocks like Apple, Nvidia (NVDA), Microsoft, Amazon.com (AMZN) and Meta Platforms (META).
In terms of sector weightings, the top three are technology (30.5%), financials (13.7%) and healthcare (11%).
Morningstar seems to agree that SPTM is one of the top index funds out there, giving the ETF a four-star rating over three-, five- and 10-year periods. Its annualized return from inception is 8.1%.
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Invesco QQQ Trust
- Type: Large growth
- Assets under management: $300.0 billion
- Dividend yield: 0.6%
- Expenses: 0.20%
The Invesco QQQ Trust (QQQ, $495.40) is considered the best index fund for investors seeking exposure to innovative companies in the tech sector and elsewhere.
The ETF tracks the performance of the Nasdaq-100 index, a collection of 100 of the largest domestic and international non-financial companies listed on the Nasdaq Composite.
Invesco launched QQQ in March 1999. Since its inception, it has significantly outperformed the S&P 500: A $10,000 investment in QQQ in 1999 was worth $61,786 as of September 30, 2024, nearly $20,000 more than the index.
According to Lipper, QQQ has been the best-performing large-cap growth fund over the past 15 years. It's also the second most-traded ETF in the U.S. based on average daily volume, and it gets a five-star rating from Morningstar for its 10-year risk-adjusted return.
Because of its innovation focus, there are times when its performance lags, as was the case in 2022. As a result, QQQ's total return was -32.6%, nearly 80% worse than the SPDR S&P 500 ETF Trust. However, in 2023, it generated a total return of 54.8%, more than two times greater than SPY.
Over the long haul, QQQ has proven it can deliver for investors.
More than 50% of the fund's holdings are in the tech sector, followed by communication services stocks (15.9%) and consumer discretionary (13.3%).
Its top-heavy, too, with its 10 biggest holdings accounting for 52% of its net assets, including Apple at 8.9%, Nvidia at 8.6% and Microsoft 7.9% of the portfolio. If you don't like many of the names with more significant weightings, QQQ might not be for you.
For everyone else, it's an excellent buy for a core ETF portfolio.
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Fidelity ZERO Large Cap Index Fund
- Type: Large blend
- Assets under management: $11.0 billion
- Dividend yield: 1.1%
- Expenses: 0.00%
The Fidelity ZERO Large Cap Index Fund (FNILX, $20.82) is the first of two mutual funds featured here, both of which are from Fidelity. The ZERO in FNILX's name represents the fees you will pay for this large-cap blend: zero.
FNILX got off the ground in September 2018. It was one of two no-fee funds Fidelity launched at that time, adding to the asset management firm's two other funds with zero expense ratios and no minimum investments from August 2018.
Fidelity could afford these no-fee funds because of its scale. To a certain extent, it had moved to a self-indexing approach, bypassing index providers such as MSCI or S&P Dow Jones. At the launch, Barron's described FNILX and its stablemates as "loss leaders," or a way to tempt investors to try out additional Fidelity products.
As for the meat of the mutual fund, FNILX tracks the performance of the Fidelity U.S. Large Cap Index, a float-adjusted, large-cap-weighted index that represents the largest U.S. companies.
The fund's sampling process considers dividend yield, capitalization, industry exposures, P/E and P/B ratios and earnings growth to create a group of holdings replicating the index's performance.
As of September 30, the Fidelity ZERO Large Cap Index Fund had 511 holdings, including portfolio heavyweights Apple (6.8%), Microsoft (6.4%) and Nvidia (6.1%). The top 10 holdings account for about 33% of its $5.9 billion in net assets.
The three largest sectors were technology (31.7%), financials (13.1%) and healthcare (11.6%).
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Fidelity International Index
- Type: Foreign large blend
- Assets under management: $55.4 billion
- Dividend yield: 2.8%
- Expenses: 0.04%
The Fidelity International Index Fund (FSPSX, $51.33) is the only non-U.S. fund covered here. The main feature is that FSPSX gives investors low-cost exposure to international stocks.
FSPSX tracks the performance of the MSCI EAFE Index, which tracks developed markets only. There are no emerging markets countries included. The index has exposure to 16 countries in Europe and the Middle East and another five from the Pacific region.
As of September 30 this foreign large-cap blend fund had about 750 holdings, with the top 10 accounting for about 14% of its $55.4 billion in net assets. Familiar names include pharmaceutical giants Novo Nordisk (NVO) and AstraZeneca (AZN) as well as semiconductor manufacturer ASML Holdings (ASML) and candy maker Nestle (NSRGY).
The top three countries by weighting are Japan (21.9%), the U.K. (14.4%) and France (11.1%). Europe accounts for two-thirds of the fund's exposure, with Japan and Asia-Pacific making up the rest.
The top three sectors are financials (20.1%), industrials (16.9%) and healthcare (13.0%). Unlike U.S. large-cap funds, you'll notice that FSPSX's tech exposure is modest, at just 8.6% of the portfolio – a little more than a quarter of the tech weighting in FNILX.
FSPSX is considered a large-cap blend, a mixture of growth and value. Large caps account for 88% of the portfolio, with mid-caps making up the rest. Value holdings are 27% of the fund, growth accounts for 22%, and 48% are a blend of the two.
The fund got its start in November 1997.
Learn more about FSPSX at the Fidelity provider site.
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