Index funds hold a prestigious place in financial circles, yet grasping their intricacies and advantages can be challenging for those new to investing.
Personal finance, especially when it comes to index funds, demands a customized strategy. Selecting the most suitable index fund depends greatly on an individual’s specific financial goals and circumstances.
Fortunately, there is help available to guide you toward the right choice.
In this article, we delve into seven standout index funds that are especially suitable for beginner investors in 2024. These selections are expected to offer more benefits compared to many other index funds in the market. We will also shed light on the intricacies of index funds, providing you with the necessary information to make informed and confident investment decisions in the future.
Let’s dive into the details.
Disclaimer: This article does not constitute individualized investment advice. These funds appear for your consideration and not as investment recommendations. Act at your own discretion.
Table of Contents
What Is an Index Fund?
Simply put, a “fund” is a basket of securities (think stocks or bonds) that allows you to put a broader strategy to work via one single holding. An “index fund” is a more specific type of fund: one that’s guided by a simple benchmark (an “index,” which is governed by certain rules) to meet that strategic goal.
There are literally thousands of index funds out there, all with different approaches. But whether you’re talking about a stock market index fund linked to a popular benchmark (like the Dow Jones Industrial Average) or whether you’re talking about bond index funds tied to U.S. Treasuries, the basic approach is the same: The fund simply holds a group of securities that are tied together by some rules and some common thread.
Index Funds vs. Actively Managed Funds
It might sound counterintuitive, but one of the biggest advantages to investing in index funds is the fact that they are “passively managed.” That’s in contrast to “actively managed,” in which one or more human beings determine what stocks, bonds, or other securities to hold.
Why is that an advantage?
The first major benefit is that a simple and passive approach saves you on fees. There is no overpriced fund manager making trades based on gut instinct—just a fixed list of holdings like the 30 components of the Dow or the 500 companies in the S&P 500. Low-cost index funds can charge just a few dollars per year in fees for investors with $10,000 or less, versus tens if not hundreds of dollars for actively managed funds.
The second big benefit to investing in index funds vs. actively managed funds is that passive management has historically delivered better performance.
One of the most powerful stats comes from investing data provider S&P Dow Jones Indices, talking about the performance of large-cap funds, which are funds that invest in larger companies. Emphasis ours:
“[In 2021], large-cap funds continued their underperformance for the 12th consecutive calendar year, as 85% of active large-cap funds trailed the S&P 500.”
Clearly it’s not just the cost savings that make index funds appealing, but this potential for better overall returns, too.
If so, your options will almost certainly be limited to mutual funds.
Mutual funds work just like how we described above: You invest in the fund, and then you share in the profits (or losses) of the fund, which is dictated by how their stocks, bonds, etc., perform.
Your company administrator will ultimately decide which mutual funds you can choose from. But while many mutual funds are indeed actively managed, chances are that index mutual funds will be well-represented. We’ll cover a few representative standouts later, but keep in mind you may not be able to find the exact same investment based on the short list of options in your employer-based plan. Be flexible, and where we can, we’ll list a few popular alternatives.
Also, while it’s not as popular as it once was, some investors do choose to own mutual funds in a taxable brokerage account. But keep in mind that, even if they’re index-based, mutual funds can typically have higher fee structures than the other type of fund we’re about to talk about.
Exchange-Traded Funds (ETFs)
One interesting development over the last decade or two has been the rise of exchange-traded funds, or ETFs.
An exchange-traded fund is similar to a mutual fund in that it holds a basket of stocks, bonds, or other investments that you can easily buy all at once. But as the name suggests, it trades on an exchange across the full scope of market hours, just like a regular stock. That’s actually different from mutual funds, where all trades in that fund settle just once per day. (What you need to know: This allows for easier trading and lower costs, among other things.)
Not all mutual funds are actively managed, but most are. Conversely, not all ETFs are index funds, but most are—only about 2% of all exchange-traded funds are actively managed, but they do still exist.
So remember: Just because you’re buying an ETF doesn’t automatically mean you’re buying an index fund. Always check before you buy.
Index Funds to Consider As a Beginner in 2024
Now that you have a little background, it’s time to consider the best index funds for you—based on your personal financial goals, of course.
One way to think about it is: What kinds of investments do you want to hold? Well, here are seven popular strategies that are covered in 2024’s lineup of the best index funds for beginners:
— Large-cap stocks, covering the largest and most mature companies
— Small-cap stocks, covering smaller companies that are less secure, but often have more growth potential
— Growth stocks, with a bias toward companies that are growing earnings and sales
— Dividend stocks, which regularly share a portion of their profits directly with shareholders
— International stocks, for those looking to diversify their portfolios (in other words, hold multiple types of investments) and seek new opportunities by also investing outside the U.S.
— Total world stock market, basically a giant bundle of stocks of all sizes from here and around the globe
— Bond investing, to provide a steady stream of income via an asset outside the stock market
With that, let’s get to these seven stellar starter funds. For each pick, we’ll quickly highlight:
— What type of fund it is (mutual fund or ETF)
— Assets under management (how much money is invested in the fund)
— Expense ratio (how much it costs). Note that fees are automatically taken out of fund performance; you don’t manually pay a fund company or brokerage firm
— Dividend yield (how much of the price, as a percent, you can expect to receive back in cash dividends every year)
Then we’ll explain why investors like each strategy, and why these index funds in particular stand out against their competition.
1. Best Large-Cap Index Fund: Fidelity 500 Index
— Type: Mutual fund
— Assets under management: $471.4 billion
— Expense ratio: 0.015%, or $1.50 per year for every $10,000 invested
— Dividend yield: 1.4%
It’s just about impossible to pick the best large cap index fund because there are so many of them out there, and so many of them have very similar approaches and cost structures.
But the Fidelity 500 Index (FXAIX) mutual fund is among the very best for a few reasons.
First, it’s simple. It’s merely tied to the S&P 500 Index, which is primarily made up of America’s largest corporations—names like Microsoft (MSFT) and Johnson & Johnson (JNJ). So however the index performs, FXAIX will perform (backing out fees, of course).
Speaking of those fees, this Fidelity index fund’s cost structure is as close to free as you can get. If you invest a whopping $10,000 in the fund, you still will only spend $1.50 per year in fees.
These two features have led it to be wildly popular, gathering hundreds of billions of dollars in assets under management.
To be clear, there are plenty of low-cost index funds—both mutual funds and exchange-traded funds—tied to the S&P 500. That includes both the Vanguard S&P 500 ETF (VOO) and iShares Core S&P 500 ETF (IVV), which also have hundreds of billions under management and rock-bottom cost structures. So if you can’t get this particular Fidelity index fund in your 401(k), or if you get even lower costs by going with your broker’s home-grown S&P option, it’s probably just as good a choice to go with those look-alikes.
2. Best Small-Cap Index Fund: Schwab U.S. Small-Cap ETF
— Type: Exchange-traded fund (ETF)
— Assets under management: $15.2 billion
— Expense ratio: 0.04%, or $4 per year for every $10,000 invested
— Dividend yield: 1.5%
If you’re either not interested in Wall Street’s bigger players, or you want to combine them with smaller companies in pursuit of bigger growth potential, consider the Schwab U.S. Small-Cap ETF (SCHA).
Just like FXAIX, SCHA follows an index—albeit, a far lesser-known index than the S&P 500, one called the “Dow Jones U.S. Small-Cap Total Stock Market Index.” This is a wide index, allowing holders of this ETF to access more than 1,700 mostly small-sized (but also some mid-sized) stocks.
You won’t find many large or recognizable names here. And prices in small-cap stocks can be more volatile because they’re less mature and aren’t as well capitalized as mega-cap tech stocks. So why hold them? Well, these kinds of companies have the potential to grow significantly and join the elite names on Wall Street if things go their way.
What’s also preferable about this low-cost index fund is how no single stock has much power to disrupt the entire portfolio. SCHA’s largest holding right now is cloud software firm Nutanix (NTNX), and it only accounts for just over three-tenths of a percentage of all of SCHA’s assets!
Schwab is among the biggest firms that have pushed down pricing in many areas of the retail investing marketplace. And this broad small-cap index fund is a great example of how more sophisticated investing tools don’t have to cost an arm and a leg in 2024.
3. Best Growth Index Fund: Vanguard Growth ETF
— Type: Exchange-traded fund (ETF)
— Assets under management: $104.5 billion
— Expense ratio: 0.04%, or $4 per year for every $10,000 invested
— Dividend yield: 0.5%
If you’re interested in growth potential but don’t only want to focus on smaller names, good news: You don’t have to.
As the name implies, the Vanguard Growth ETF (VUG) is one of the best index funds for investors looking at stocks with expanding sales and profits. But what the name doesn’t also tell you is that it mostly focuses on larger growth names.
There’s nothing wrong with sleepier stocks like utilities or companies that specialize in consumer staples like packaged foods or toiletries. But let’s face it: Americans aren’t going to double their consumption of electricity or canned goods anytime soon.
Fortunately, this Vanguard index fund is designed to focus on the stocks that do have potential for growth. For instance, technology stocks like Apple (AAPL) represent a whopping 45% of the entire portfolio at present. Big consumer names including Amazon.com (AMZN) and Home Depot (HD) also make up about 17% of VUG’s assets.
With higher growth potential often comes higher risk. But putting your money into larger growth names helps defray some of the potential downsides. And if you’re planning to hold this index fund for the long term—a mindset new investors absolutely should adopt—then you can afford to ride out some of the day-to-day volatility in what’s still one of 2024’s best index funds for beginners.
4. Best Dividend Index Fund: Schwab US Dividend Equity ETF
— Type: Exchange-traded fund (ETF)
— Assets under management: $52.3 billion
— Expense ratio: 0.06%, or $6 per year for every $10,000 invested
— Dividend yield: 3.6%
Growth/price gains aren’t the only way to build wealth through investing. Some publicly traded companies take some of their profits and deliver it back to shareholders—and these cash payments are referred to as “dividends.”
A dollar in dividends here and a dollar in dividends there, over time, can add up to massive gains. Consider this from Standard & Poor’s:
“Since 1926, dividends have contributed approximately 32% of total return for the S&P 500, while capital appreciations have contributed 68%.”
That’s right: Nearly a third of the index’s return has come from publicly traded companies’ cash payments to you!
Sure, in some ways, dividends actually take away from growth potential because these companies are sharing some of their wealth instead of investing that cash in new staff or research. However, it’s universally true that companies, to fund stable dividends over time, have to have strong financial fundamentals built on real profits and a real value proposition.
Beginner investors interested in income can look to the Schwab US Dividend Equity ETF (SCHD), which delivers a much-higher-than-market-average 3.6% annually in dividend yield. By way of comparison, that’s more than double the S&P 500’s current yield of under 1.6%.
This focused Schwab index fund has about 100 holdings, but like many of the best beginner funds out there, simplicity is the point. SCHD benchmarked to the Dow Jones U.S. Dividend 100 Index, which screens the universe of the largest U.S. companies for high-yielding companies with a record of consistently paying dividends. Stocks that make the grade currently include the likes of pharmaceutical stock Merck (MRK) or semiconductor giant Broadcom (AVGO), which are among the ETF’s top holdings.
5. Best International Index Fund: Vanguard Total International Stock ETF
— Type: Exchange-traded fund (ETF)
— Assets under management: $63.2 billion
— Expense ratio: 0.07%, or $7 per year for every $10,000 invested
— Dividend yield: 3.0%
Many stock market index funds are focused solely on U.S. stocks, but they don’t have to be. In fact, many experts recommend a bit of international diversification in any long-term portfolio to help reduce risk—the U.S. often outperforms, but it doesn’t always.
That’s where an international (or ex-U.S.) fund comes in.
The Vanguard Total International Stock ETF (VXUS) ETF is one of the best-known international stock index funds on the market. It tracks the FTSE Global All Cap ex US Index, which allows it to hold large-, mid- and small-cap stocks from all corners of the world—except for the U.S., of course. And it holds everything it can get its hands on: nearly 8,500 stocks right now!
The portfolio is split 75/25 across “developed markets” (safer, stabler economies like those found in Western Europe) and “emerging markets” (faster-growing but more volatile economies like Mexico and Malaysia). Of that 75% in developed markets, 40 percentage points are in Europe, 27 points are in Asia/Pacific countries, and the rest is in Canada.
Because VXUS holds a high number of big, multinational names, you might recognize some of the companies you’d own through the fund, such as Swiss consumer products icon Nestle SA (NSRGY) and global healthcare company Novo Nordisk (NVO). But you’ll also get a heaping helping of, say, smaller Chinese or Finnish stocks you haven’t heard of and can’t easily buy on U.S. exchanges.
And like with the other top index funds on this list, VXUS stands out for charging extremely little in fees for this extra-wide international footprint.
6. Best Total Stock Market Index Fund: Vanguard Total World Stock ETF
— Type: Exchange-traded fund (ETF)
— Assets under management: $32.1 billion
— Expense ratio: 0.07%, or $7 per year on every $10,000 invested
— Dividend yield: 2.1%
What if you want an index fund that does it all—small and large sized companies, growth and value stocks, and U.S. as well as international markets? Well, you can get that via a few funds, but our favorite is the Vanguard Total World Stock ETF (VT).
The mammoth portfolio is tied to the FTSE Global All Cap Index, a total stock market index that holds more than 9,600 different companies across both well-established and still-developing markets. About 60% of that exposure comes from U.S.-based companies, but you’ll also hold stocks from developed economies like Germany and Japan as well as emerging markets like China and India.
If you’re a long-term investor looking for the best index funds, but you value simplicity above all, then consider this one-stop shop that offers truly diversified exposure across the entirety of global stocks. Your returns in VT might not be as dramatic as more tactical investments in individual stocks, sectors, or countries. But this low-cost index fund offers the kind of holistic approach that many beginner investors are looking for.
7. Best Bond Index Fund: Vanguard Total Bond Market Index Fund Admiral Shares
— Type: Mutual fund
— Assets under management: $98.9 billion
— Expense ratio: 0.05%, or $5 per year for every $10,000 invested
— SEC yield: 4.3%*
While most of the other index funds on this list are ETFs, this bond mutual fund from Vanguard is cheap, diversified, and just as effective as its exchange-traded competitors.
If you’re new to the subject: Bonds are a way for governments, companies, and other entities to raise money. You buy a bond from the U.S. government, and they agree to pay you back (with interest) by a certain date. That interest rate is delivered in a fixed “coupon payment,” usually made every six months.
Of course, it can be difficult to invest in individual bonds, and extremely difficult to research and hold a variety of them. But even newbie investors can get broad exposure via funds such as the Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX), which holds nearly 18,000 different bonds. Importantly, these bonds are what are considered “investment-grade,” meaning bond raters believe each holding meets a certain quality standard, and that it’s very likely investors will receive their full investment back. In fact, more than 70% of VBTLX’s holdings are graded AA and above from bond rating agencies, which is pretty close to bulletproof when it comes to credit ratings. Current lenders include the U.S. Treasury, giant corporations such as Johnson & Johnson (JNJ), and other similar entities with deep pockets and a high likelihood of repayment.
The good news? These bonds carry extremely little risk. The downside is, you might not get a huge reward for your investment. Bond funds rarely grow in price the way that stock funds do, so the real reward for holding VBTLX is the interest income it regularly pays. But, as interest rates have risen over the past year, so too has the yield on this index fund.
One important potential stumbling block: VBTLX has a minimum investment of $3,000. That might not be a high hurdle for some investors, but it can be for beginners. If so, you can easily tap into its exchange-traded sister fund, the Vanguard Total Bond Market ETF (BND), which you can buy for the price of just one share (currently around $73, though that can change).
* SEC yield reflects the interest earned across the most recent 30-day period. This is a standard measure for funds holding bonds and preferred stocks.
Broker Recommendation to Buy These Stocks: Interactive Brokers
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— IBKR Lite is most suitable for beginner and intermediate investors, offering unlimited commission-free U.S.-listed stock and ETF trading, and fixed pricing for non-U.S.-listed stocks and ETFs, mutual funds, options, and futures.
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You can visit Interactive Brokers to sign up or learn more.
Is an Index Mutual Fund Different From an Index ETF?
If both the exchange-traded fund and the mutual fund are benchmarked to the same index, you likely won’t notice any difference. The Fidelity 500 Index Fund (FXAIX) that’s tied to the S&P 500 is nearly identical to mutual funds like Schwab S&P 500 Index Fund (SWPPX) as well as ETFs like SPDR S&P 500 ETF Trust (SPY) and iShares Core S&P 500 ETF (IVV).
Typically, the main difference will just be the annual expense ratio and which investment apps you can use to trade them.
Is an Index Fund Always Diversified?
Not always. An index can be broad-based and hold hundreds or thousands of stocks, but it can also be specific and narrow.
For instance, there are index funds benchmarked to specific sectors like the Energy Select Sector SPDR Fund (XLE) that hold just a couple dozen Big Oil companies. On top of that, XLE lives and dies on the price of crude oil, so it can be more volatile than a fully diversified ETF.
But it’s still tied to a simple list of stocks, so it’s still technically an index fund.
Is an Index Fund Better Than an Actively Managed Fund?
The best index funds for each investor always differ based on their unique goals and risk tolerance. But that said, index funds are generally “better” than actively managed funds because they tend to offer lower cost structures and historically outperform active funds in most years.
There are always exceptions to this, of course, based on the individual investor and investments in question. Actively managed funds tend to excel in areas where specialized investment research can really pay off, like smaller companies and stocks from less-traveled countries.
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