Index funds have become increasingly popular with investors in recent years, and for good reason.
These funds are based on a preset basket of stocks or index, allowing fund managers to replicate the index without active management.
This means that investors can gain insights into the performance of stocks as a whole, making it easier to make informed investment decisions.
In this article, we will explore the best index funds to invest in 2024, as well as why these funds are so popular with investors.
Best Index Funds to Invest In
Investors seeking to invest in index funds can consider the following funds. These index funds track a broadly diversified index and are among the lowest-cost funds available in the public markets.
Cost is an important factor to consider when investing in index funds. The list includes three mutual funds and seven ETFs.
| Fund Name | Ticker | Expense Ratio |
|---|---|---|
| Fidelity ZERO Large Cap Index | FNILX | 0.00% |
| Vanguard S&P 500 ETF | VOO | 0.03% |
| SPDR S&P 500 ETF Trust | SPY | 0.09% |
| iShares Core S&P 500 ETF | IVV | 0.03% |
| Schwab S&P 500 Index Fund | SWPPX | 0.02% |
| Shelton NASDAQ-100 Index Direct | QQQX | 0.20% |
| Invesco QQQ Trust ETF | QQQ | 0.20% |
| Vanguard Russell 2000 ETF | VTWO | 0.10% |
| Vanguard Total Stock Market ETF | VTI | 0.03% |
| SPDR Dow Jones Industrial Average ETF Trust | DIA | 0.16% |
Investors should consider their investment goals and risk tolerance before investing in any of these index funds. It is important to note that past performance is not indicative of future results.
Best S&P 500 Index Funds
Fidelity ZERO Large Cap Index (FNILX)
The Fidelity ZERO Large Cap Index mutual fund is a great option for investors looking for a broadly diversified index fund at a low cost.
This mutual fund is part of Fidelity’s foray into mutual funds with no expense ratio, which means that every $10,000 invested would cost $0 annually.
Although it technically follows the Fidelity U.S. Large Cap Index, the difference is academic. The real difference is that investor-friendly Fidelity doesn’t have to cough up a licensing fee to use the S&P name, keeping costs lower for investors.
The fund can be purchased directly from the fund company or through most online brokers.
Vanguard S&P 500 ETF (VOO)
The Vanguard S&P 500 ETF is another great option for investors looking for a broadly diversified index fund at a low cost.
This ETF tracks the S&P 500 index and is backed by Vanguard, one of the powerhouses of the fund industry. With an expense ratio of 0.03 percent, every $10,000 invested would cost $3 annually.
The fund can be purchased directly from the fund company or through most online brokers.
SPDR S&P 500 ETF Trust (SPY)
The SPDR S&P 500 ETF is one of the most popular ETFs and has been around since 1993, helping to kick off the wave of ETF investing that has become so popular today.
This ETF is sponsored by State Street Global Advisors and tracks the S&P 500 index. With an expense ratio of 0.095 percent, every $10,000 invested would cost $9.50 annually.
The fund can be purchased directly from the fund company or through most online brokers.
iShares Core S&P 500 ETF (IVV)
The iShares Core S&P 500 ETF is sponsored by BlackRock, one of the largest fund companies. This ETF is one of the largest ETFs and tracks the S&P 500 index.
With an expense ratio of 0.03 percent, every $10,000 invested would cost $3 annually. The fund can be purchased directly from the fund company or through most online brokers.
Schwab S&P 500 Index Fund (SWPPX)
The Schwab S&P 500 Index Fund is a great option for investors looking for a broadly diversified index fund at a low cost.
This mutual fund has a strong record dating back to 1997 and is sponsored by Charles Schwab, one of the most respected names in the industry.
With an expense ratio of 0.02 percent, every $10,000 invested would cost $2 annually.
The fund can be purchased directly from the fund company or through most online brokers.
Best Nasdaq Index Funds
Shelton NASDAQ-100 Index Direct (NASDX)
The Shelton NASDAQ-100 Index Direct ETF is an index fund that tracks the performance of the largest non-financial companies in the Nasdaq-100 Index, which primarily includes tech companies.
This mutual fund has a strong record over the last five and ten years and is a good fit for investors looking for an index fund that gives them exposure to the tech industry and growth-oriented companies.
The expense ratio for this fund is 0.52 percent, which means every $10,000 invested would cost $52 annually. The fund can be purchased directly from the fund company or through most online brokers.
Invesco QQQ Trust ETF (QQQ)
The Invesco QQQ Trust ETF is another index fund that tracks the performance of the largest non-financial companies in the Nasdaq-100 Index. This ETF is managed by Invesco, a fund giant, and is the top-performing large-cap growth fund in terms of total return over the 15 years to December 2023, according to Lipper.
This fund is great for investors looking for a relatively low-cost index fund that focuses on technology and growth companies. The expense ratio for this fund is 0.20 percent, which means every $10,000 invested would cost $20 annually. The fund can be purchased directly from the fund company or through most online brokers.
In summary, the Shelton NASDAQ-100 Index Direct and Invesco QQQ Trust ETF are two of the best Nasdaq index funds for investors looking to gain exposure to the tech industry and growth-oriented companies. With their strong records and relatively low expense ratios, these funds are great options for those looking to invest in the Nasdaq-100 Index.
More Top Index Funds
Vanguard Russell 2000 ETF (VTWO)
The Vanguard Russell 2000 ETF is an index fund that tracks the Russell 2000 Index, which consists of about 2,000 of the smallest publicly traded companies in the U.S. This ETF was launched in 2010 and is managed by Vanguard, which focuses on keeping costs low for investors. With an expense ratio of 0.10 percent, this fund is a great option for investors who want broad exposure to small-cap companies at a low cost.
Investors can purchase the fund directly from Vanguard or through most online brokers.
Vanguard Total Stock Market ETF (VTI)
The Vanguard Total Stock Market ETF is another index fund offered by Vanguard that effectively covers the entire universe of publicly traded stocks in the U.S. This fund consists of small, medium, and large companies across all sectors and has been around since 2001. With an expense ratio of only 0.03 percent, this fund is an attractive option for investors who are looking for a low-cost index fund that is broadly diversified across the market-cap spectrum.
Investors can purchase the fund directly from Vanguard or through most online brokers.
SPDR Dow Jones Industrial Average ETF Trust (DIA)
The SPDR Dow Jones Industrial Average ETF Trust is an index fund that tracks the 30-stock index of large-cap stocks in the Dow Jones Industrial Average. This fund, managed by State Street Global Advisors, has been around since 1998 and has tens of billions under management. With an expense ratio of 0.16 percent, this fund is a good option for investors who are looking for exposure to blue-chip companies or the specific components of the Dow Jones Industrial Average at a low cost.
Investors can purchase the fund directly from State Street Global Advisors or through most online brokers.
Why Index Funds are Popular with Investors
Index funds have become increasingly popular with investors due to their promise of ownership of a wide variety of stocks, greater diversification, and lower risk, usually at a low cost. This section will delve into the reasons why index funds have become a superior investment option for many investors, especially beginners.
Attractive Returns
Like all stocks, major indexes will fluctuate. However, over time, indexes have made solid returns, such as the S&P 500’s long-term record of about 10 percent annually. Although index funds do not make money every year, over long periods of time, they have been known to provide an average return.
Diversification
Investors like index funds because they offer immediate diversification. With one purchase, investors can own a wide swath of companies. One share of an index fund based on the S&P 500 provides ownership in hundreds of companies, while a share of Nasdaq-100 fund offers exposure to about 100 companies. This diversification reduces the risk of investing in a single company or industry.
Lower Risk
Because they are diversified, investing in an index fund is lower risk than owning a few individual stocks. That does not mean one cannot lose money or that they are as safe as a CD, for example. However, the index will usually fluctuate a lot less than an individual stock, reducing the overall risk.
Low Cost
Index funds can charge very little for these benefits, with a low expense ratio. For larger funds, investors may pay $3 to $10 per year for every $10,000 invested. In fact, some funds like Fidelity’s ZERO Large Cap Index charge no expense ratio at all. Cost is one of the most important factors in an investor’s total return when it comes to index funds.
While some funds such as S&P 500 or Nasdaq-100 index funds allow investors to own companies across industries, other funds own only a specific industry, country, or even investing style, such as dividend stocks. Overall, index funds offer investors an efficient and cost-effective way to diversify their portfolios and reduce risk while still achieving attractive returns.
How to Invest in an Index Fund in 3 Easy Steps
1. Research and Analyze Index Funds
Before investing in an index fund, it is important to research and analyze the available options. While the S&P 500 index fund is the most popular, there are also funds available for different industries, countries, and investment styles. The following factors should be considered when selecting an index fund:
- Location: The geographic location of the investments is an important factor to consider. The S&P 500 and Nasdaq-100 index funds own American companies, while other index funds may focus on a narrower location, such as France, or a broader one, such as the Asia-Pacific region.
- Business: The market sector in which the index fund invests is another important consideration. Some funds specialize in certain industries and avoid others, such as pharma companies making new drugs or tech companies.
- Market Opportunity: The opportunity presented by the index fund should also be evaluated. Some funds invest in high-yield stocks, while others focus on high-growth stocks.
It is important to carefully examine what the fund is investing in to have a better idea of what is actually owned. Checking the index’s holdings can provide a clearer understanding of the fund.
2. Decide Which Index Fund to Buy
After selecting a fund, other factors should be considered to determine if it is a good fit for the portfolio. The expenses of the fund are a significant factor that can affect returns over time. The following factors should be considered when deciding which index fund to buy:
- Expenses: Comparing the expenses of each fund being considered is essential. Some funds based on a similar index can charge 20 times as much as another.
- Taxes: Mutual funds tend to be less tax-efficient than ETFs for legal reasons. At the end of the year, many mutual funds pay a taxable capital gains distribution, while ETFs do not.
- Investment Minimums: Many mutual funds have a minimum investment amount for the first purchase, often several thousand dollars. In contrast, many ETFs have no such rule, and fractional shares can be purchased with just a few dollars.
3. Purchase Your Index Fund
After selecting the index fund that fits the portfolio, the next step is to purchase the fund. The fund can be purchased directly from the mutual fund company or through a broker. It is usually easier to buy a mutual fund through a broker, while an ETF needs to be purchased through a broker.
Investing in an index fund can be a simple and effective way to invest in the stock market. By following these three easy steps, investors can make informed decisions about which index fund to purchase and how to manage their portfolio.
Considerations for Investing in Index Funds
When considering investing in index funds, there are several factors to take into account, including long-run performance, expense ratio, trading costs, fund options, and convenience. Additionally, investors should be aware of the risks associated with index funds and any fees that may be associated with them.
Index Fund Risks
While index funds are often highly diversified, putting money into any market-based investment such as stocks or bonds means that investors could lose it all if the company or government issuing the security runs into severe trouble. However, the situation is different for index funds because they are often so diversified.
An index fund usually owns at least dozens of securities and may own potentially hundreds of them, meaning that it’s highly diversified. In the case of a stock index fund, every stock would have to go to zero for the index fund, and thus the investor, to lose everything.
So while it’s theoretically possible to lose everything, it doesn’t happen for standard funds. That said, an index fund could underperform and lose money for years, depending on what it’s invested in. But the odds that an index fund loses everything are very low.
Are There Fees Associated with Index Funds?
Index funds may have a couple different kinds of fees associated with them, depending on which type of index fund. Index funds sponsored by mutual fund companies may charge two kinds of fees: a sales load and an expense ratio. A sales load is just a commission for buying the fund, and it may happen when you buy or when you sell or over time.
Investors can usually avoid these by going with an investor-friendly fund company such as Vanguard, Charles Schwab or Fidelity. An expense ratio is an ongoing fee paid to the fund company based on the assets you have in the fund. Typically these are charged daily and come out of the account seamlessly.
Index funds sponsored by ETF companies (many of which also run mutual funds) charge only one kind of fee, an expense ratio. It works the same way as it would with a mutual fund, with a tiny portion seamlessly deducted each day you hold the fund. ETFs have become more popular recently because they help investors avoid some of the higher fees associated with mutual funds. ETFs are also becoming popular because they offer other key advantages over mutual funds.
Investors should carefully consider the fees associated with index funds before investing. While expense ratios are generally lower for index funds than for actively managed funds, they can still add up over time. It’s important to compare the expense ratios of different index funds to ensure that you’re getting the best value for your money.
In conclusion, index funds can be a great option for investors looking for a low-cost, diversified investment option. However, investors should carefully consider the risks and fees associated with index funds before investing. By doing so, investors can make informed decisions and potentially maximize their returns over the long run.
What is Considered a Good Expense Ratio?
When it comes to expense ratios, mutual funds and ETFs are among the cheapest options, with the figure varying depending on whether they invest in bonds or stocks.
In 2022, the average stock index mutual fund charged 0.05 percent on an asset-weighted basis, which equates to $5 for every $10,000 invested. Meanwhile, the average stock index ETF charged 0.16 percent asset-weighted, or $16 for every $10,000 invested.
Index funds are generally much cheaper than average funds. For instance, the average stock mutual fund (on an asset-weighted basis) charged 0.44 percent, which is significantly higher than the average stock ETF that charged 0.16 percent. This is because many mutual funds are not index funds and therefore charge higher fees to cover the higher expenses of their investment management teams.
As a general rule, anything below the average expense ratio should be considered a good expense ratio.
However, it is important to keep these costs in perspective and recognize that the difference between an expense ratio of 0.10 percent and 0.05 percent is just $5 per year for every $10,000 invested. With that said, there is no reason to pay more for an index fund tracking the same index.
The following table summarizes the average expense ratios for different types of funds:
| Fund Type | Average Expense Ratio |
|---|---|
| Stock Index Mutual Fund | 0.05% |
| Stock Index ETF | 0.16% |
| Stock Mutual Fund | 0.44% |
In summary, investors should aim for expense ratios that are below the average for their chosen fund type. By doing so, they can minimize costs and potentially increase their investment returns over the long run.
Is Now a Good Time to Buy Index Funds?
Investing in index funds can be a good long-term strategy for investors who are willing to ride out any short-term volatility. The market tends to rise over time, as the economy grows and corporate profits increase. Therefore, time is an investor’s best friend, allowing them to compound their money and make money from their money.
However, it’s important to note that narrowly diversified index funds, such as those focused on one industry, may perform poorly for years. Therefore, investors should consider purchasing broadly diversified index funds, such as the S&P 500.
Experts recommend that investors adopt a patient approach and avoid timing the market, which involves jumping in and out of the market to capture gains and dodge losses. Instead, investors should add money to the market regularly to take advantage of dollar-cost averaging and lower their risk.
In summary, for investors who have a long-term investment horizon and are willing to ride out short-term volatility, now can be a good time to buy index funds. However, it’s important to choose broadly diversified index funds and adopt a patient approach to investing.
Bottom Line
Index funds are a great way for investors to own a diversified collection of stocks at a lower cost. These funds offer lower risk and have become some of the largest on the market. However, investors are advised to conduct independent research into investment strategies before making any investment decisions. It is important to keep in mind that past performance is not a guarantee of future price appreciation.