Best Index Funds To Invest In: A Nerdwallet Guide

Index funds are a low-cost, passive investment strategy that aims to mirror the performance of a particular market index, such as the S&P 500 or the Nasdaq Composite Index. By investing in index funds, individuals can gain exposure to a diverse range of stocks or bonds without having to spend time researching and selecting individual stocks. Index funds are considered less risky than investing in individual stocks and typically perform better than actively managed funds over the long term. When choosing an index fund, it is important to consider factors such as the fund's fees, performance history, and the size of the fund.

Best index funds by investment minimum and expense ratio

Index funds are a great way to build wealth over the long term. They are a group of stocks that mirror the performance of an existing stock market index, such as the S&P 500.

When it comes to choosing an index fund, there are a few key factors to consider, such as the investment minimum and expense ratio. Here are some of the best index funds in terms of these criteria:

Best index funds by investment minimum:

• Vanguard 500 Index Fund - Admiral Shares (VFIAX): This fund, also known as the Vanguard S&P 500 Index fund, gives exposure to 500 of the largest US companies, which make up about 75% of the US stock market's total value.
• Schwab S&P 500 Index Fund (SWPPX): Launched in 1997, this fund has a low expense ratio of 0.02% and requires no minimum investment, making it attractive for investors concerned about costs.
• Fidelity 500 Index Fund (FXAIX): Fidelity removed the investment minimum on this fund, so investors with any budget can participate.
• T. Rowe Price Equity Index 500 Fund (PREIX): This fund has a competitive expense ratio, but its $2,500 minimum may be steep for beginners.

Best index funds by expense ratio:

• Fidelity Zero Large Cap Index (FNILX): This fund stands out for having a 0% expense ratio, meaning investors don't pay any annual expenses.
• Invesco Nasdaq 100 ETF (QQQM): This fund tracks the Nasdaq-100 index and has an expense ratio of 0.15%, which is competitive for this type of fund.
• Vanguard Growth ETF: With an expense ratio of just 0.04%, this fund offers exposure to 200 US large-cap growth stocks.
• SPDR S&P Dividend ETF: While this fund has a slightly higher expense ratio of 0.35%, it is a top-performing index fund for income-oriented investors, focusing on companies with a history of reliable dividend payments.
• Vanguard Real Estate ETF: With an expense ratio of 0.12%, this fund offers exposure to the real estate market and is attractive to dividend investors, with a 12-month dividend yield of 4.01% as of April 30, 2024.

Remember to consider your investment goals and conduct thorough research before choosing an index fund. Diversification, low costs, and long-term performance are key advantages of index funds.

Index funds vs. actively managed funds

Index funds are a type of investment that attempts to track the overall success of a particular market or index, like the S&P 500 or Dow Jones Industrial Average. They do this by offering small pieces of most or all of the stocks in an index, pooled together. Index funds are passively managed, which means they don't require active management. This passive management style allows the manager to charge lower investment advisory fees.

Actively managed funds, on the other hand, are funds where professional money managers attempt to outperform the market by hand-picking stocks and bonds that they believe will generate higher returns. These funds try to beat market returns rather than simply matching them. Actively managed funds are associated with higher fees than passively managed funds like index funds.

Index funds are a great investment for building wealth over the long term, which is why they are popular with retirement investors. They are also less expensive than actively managed funds and typically carry less risk than individual stocks. According to SPIVA, only 9% of actively managed funds beat the S&P 500 in 2021.

When choosing between index funds and actively managed funds, it ultimately comes down to how much risk you're willing to take for the possibility of higher performance. Index funds are a good option for those who want a more passive approach to investing, while actively managed funds may be better for those who want the potential for higher returns and are willing to take on more risk.

How to choose an index fund

Index funds are a great investment for building wealth over the long term. They are a group of stocks that mirror the performance of an existing stock market index, such as the Standard & Poor's 500 index. Here are some tips on how to choose an index fund:

• Know the index you want to track: Before investing in index funds, it is important to know which market index you want your fund to track. Common benchmarks for index funds include the S&P 500, the Dow Jones Industrial Average, the Nasdaq Composite, the Russell 2000 Index, and the MSCI EAFE Index.
• Research index funds: When investigating an index fund, consider factors such as company size and capitalization (small-, mid-, or large-cap indexes), geography, business sector or industry, asset type, and market opportunities.
• Compare costs: Index funds are known for their low costs, but fees can vary. Look for funds with low expense ratios, which are annual fees charged as a percentage of your investment. Also, consider the fund's investment minimum, the initial amount required to invest.
• Consider the fund's performance and history: Look for index funds with several years of operation and a healthy amount of assets under management (AUM). A longer track record provides more information about the fund's performance history, and a higher AUM may indicate greater stability in volatile markets.
• Diversify your portfolio: Investing in multiple index funds tracking the same index may not provide additional diversification. Instead, consider investing in index funds that cover different market indexes, such as the Dow Jones or Nasdaq, to further diversify your portfolio.
• Choose where to buy your index funds: You can purchase index funds directly from a mutual fund company or a brokerage. Compare fund selection, convenience, trading costs, and impact investing options when choosing a provider.

How to invest in index funds

Index funds are a low-cost, passive way to build wealth. 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 don't try to beat the market but instead aim to be the market by buying stocks of every firm listed on a market index.

• Have a goal: Know what you want your money to do for you. If you're looking to make a lot of money quickly, you may be more interested in individual stocks or cryptocurrencies. However, if you want your money to grow slowly over time, index funds may be a good option.
• Research index funds: Look at the index fund's company size, geography, business sector, asset type, and market opportunities. You may only need to invest in one broad stock market index, as recommended by Warren Buffett, but you can always customise your fund mix.
• Pick your index funds: This often comes down to cost. Index funds are cheap to run because they are automated, but don't assume that all index funds are cheap. They still carry administrative costs that are subtracted from each shareholder's returns as a percentage of their overall investment.
• Decide where to buy your index funds: You can purchase an index fund directly from a mutual fund company or a brokerage. Consider factors such as fund selection, convenience, trading costs, impact investing, and commission-free options.
• Buy your index fund: To purchase shares of an index fund, you'll need to open an investment account, such as a brokerage account, individual retirement account (IRA), or Roth IRA.
• Keep an eye on your index funds: Index funds are passive, but you should still monitor their performance. Check that the index fund is mirroring the performance of the underlying index. Also, keep an eye on the fees; if they start stacking up, you may want to reevaluate.

Some popular index funds include:

• Vanguard S&P 500 ETF (VOO)
• SPDR S&P 500 ETF Trust (SPY)
• Fidelity ZERO Large Cap Index (FNILX)
• IShares Core S&P 500 ETF (IVV)
• Schwab S&P 500 Index Fund (SWPPX)

Index funds vs. mutual funds

Index funds and mutual funds are both investment options that pool money from shareholders to invest in assets such as stocks and bonds. However, there are some key differences between the two.

Management Style

Index funds are passively managed, meaning they track a specific market index such as the S&P 500 or Dow Jones Industrial Average. They offer small pieces of most or all of the stocks in an index, pooled together. On the other hand, most mutual funds are actively managed, meaning individuals or companies make decisions on which investments to buy or sell based on what they believe will create the best return for investors.

Investment Objective

The sole objective of an index fund is to mirror the performance of the underlying index. In contrast, the objective of an actively managed mutual fund is to outperform the index by earning higher returns through expert stock picking.

Cost

Index funds have lower fees than actively managed mutual funds because they require less human intervention and management. The expense ratios of index funds tend to be lower, which means they can often outperform higher-cost funds over the long term. Actively managed mutual funds tend to have higher expense ratios, which can cut into the returns that investors receive.

Risk and Returns

Index funds are considered less volatile and risky than mutual funds because they are more diversified. They are also seen as a good investment for building wealth over the long term. While mutual funds may offer the potential for higher returns through active management, they also come with the risk of underperforming the market.

Flexibility and Control

Index funds offer less flexibility and choice than mutual funds. They give investors less control over their investments. Mutual funds, on the other hand, provide a wider range of investment choices and allow investors to customize their portfolio based on their specific objectives and strategies.

Frequently asked questions