Index Funds: Safest Bets For Long-Term Investors

Index funds are a great way to build wealth over time and are popular with retirement investors. They are a group of stocks that mirror the performance of an existing stock market index, such as the Standard & Poor's 500 index. Index funds are considered safer than individual stocks because they are diversified, low-cost, and less risky. They are also passively managed, meaning they aim to replicate the performance of an index without active management. Some of the safest index funds to invest in include the Vanguard S&P 500 ETF, the Fidelity ZERO Large Cap Index Fund, and the iShares Core S&P Total U.S. Stock Market ETF. These funds have low expense ratios, track broad market indexes, and are offered by reputable companies.

The S&P 500 Index Fund

While the S&P 500 Index Fund is considered safe, it is important to remember that it is not a risk-free investment. The index has historically fallen by 20% or more from recent highs every few years, as was seen during the 2022 bear market. However, over time, the S&P 500 has consistently delivered solid returns, with a long-term record of about 10% annually.

The Vanguard S&P 500 ETF

The fund began trading in 2010 and is backed by Vanguard, one of the most reputable companies in the fund industry. With hundreds of billions in assets, it is one of the largest and most popular ETFs on the market.

The fund's performance has been solid, with a 5-year annualized return of 15.6%. This is in line with the S&P 500's long-term average annual return of around 10%.

Legendary investor Warren Buffett has endorsed this type of investment, stating that a low-cost S&P 500 index fund is the best investment the average American can make.

The Fidelity ZERO Large Cap Index Fund

Overview

Performance and Returns

As of November 2024, the fund has a 5-year annualized return of 15.7%, demonstrating solid performance over the medium term. This return is comparable to other leading index funds, making it a competitive option for investors.

Investment Strategy

The fund aims to replicate the performance of the Fidelity U.S. Large Cap Index without active management. This passive approach helps keep costs low and provides investors with exposure to a diverse range of large-cap stocks.

Investment Minimums and Accessibility

One of the significant advantages of the Fidelity ZERO Large Cap Index Fund is its low minimum investment requirement. With no minimum initial investment, it is accessible to a wide range of investors, including those just starting their investment journey. The fund can be purchased directly from Fidelity or through most online brokers, making it convenient for those looking to add it to their portfolio.

Suitability

This fund is ideal for investors seeking broad diversification at a low cost. The zero expense ratio makes it attractive for those wanting to maximize their returns without incurring additional fees. It is well-suited as a core holding in a portfolio, providing exposure to a wide range of large-cap companies.

In summary, the Fidelity ZERO Large Cap Index Fund offers a compelling combination of broad diversification, strong performance, and low costs. With no expense ratio and accessibility through various brokers, it is an excellent choice for investors looking to add a large-cap index fund to their portfolio.

The Vanguard Russell 2000 ETF

One of the key advantages of this ETF is its low expense ratio of 0.10%. This means that for every $10,000 invested, you will be charged $10 annually. This makes it a cost-effective option compared to other funds with higher expense ratios. The fund has delivered a 5-year annualised return of 8.8%, which is slightly lower than some of the other broad-based index funds on the market.

The Vanguard Total Stock Market ETF

Overview

Performance

The fund has a strong long-term performance track record. From 1965 through the end of 2023, the overall US stock market, which this ETF tracks, delivered annualised total returns of 10.2%. This has resulted in significant wealth creation over the long term. While short-term fluctuations are inevitable, the consistency of the market's performance is notable.

Expense Ratio

One of the key advantages of this ETF is its low expense ratio of 0.03%. This means that for every $10,000 invested, investors pay only $3 annually in fees. This low expense ratio is a significant advantage, as it maximises investors' returns by minimising costs.

Diversification

Suitability

This ETF is well-suited for investors seeking a low-cost, broadly diversified investment option that provides exposure to the overall US stock market. It is ideal for those who want to own a representative slice of the US stock market in a single fund. The fund's low expense ratio and strong historical performance make it attractive for long-term wealth accumulation.

How to Buy

Frequently asked questions