What's the best way to invest in stocks with no experience? Many will suggest you buy into an index fund. These investment vehicles, usually marketed as exchange-traded funds (ETFs), often track an index, which is a collection of stocks with some criteria in common.
There are indexes for nearly anything you can think of. There are indexes that track utility companies, small-cap companies, or companies that operate exclusively in China. There are even indexes focused solely on dividend-paying stocks, or stocks that are expected to grow faster than the market.
If you're just starting as an investor, there's one index fund in particular you should be targeting: the Vanguard Utilities ETF (VPU 0.76%).
Two reasons to buy this index fund today
When it comes to index funds, Vanguard is king. The company's founder, the late Jack Bogle, is popularly referred to as the "father of indexing." His life goal was to make sure everyday investors were able to invest wisely without paying an arm and a leg in management fees. Index funds allow investors to do just that, gaining broad market exposure while keeping fees to a minimum.
The Vanguard Utilities ETF, for example, has an expense ratio of just 0.1%. That means you get to keep 99.9% of your investment year to year. The average expense ratio of similar funds from actively managed investment firms is around 1.01%, according to Vanguard.
But you shouldn't just buy this fund for the low fees. You should be most excited about the fund's long-term performance, especially during market downturns. Since 2004 -- the year the fund was launched -- the Vanguard Utilities ETF has returned and average of roughly 9% per year. If you had invested $5,000 when the fund began, your total return (which reinvests dividends) would be about $28,280 today. These returns were made possible by the index funds' underlying portfolio of stocks it buys, which includes utility stocks like NextEra Energy and Duke Energy. These companies can be less volatile than the market overall given that they provide recession-resistant products. After all, people keep heating their homes, drinking water, and using electricity even during the worst bear markets.
The resiliency of this index fund became apparent during the 2007-09 financial crisis. Through the worst of the downturn, the Vanguard Utilities ETF showed far less volatility than the market overall. From 2007 to 2010, for example, the S&P 500 lagged the performance of the Vanguard Utilities ETF by double-digit percentage points during some months. Because of the recession-resistant nature of utilities, expect this ETF to outperform the market again during the next bear market.
Is the Vanguard Utilities ETF right for you?
The Vanguard Utilities ETF can be purchased with investments as little as $1. This index fund is likely available through your brokerage account right now. You can also sign up directly with Vanguard and buy into the fund directly.
But is it right for you?
This index fund can deliver both long-term returns and downside protection during bear markets. The fees are also nearly as low as they come, allowing you to keep almost all of the profits. So it makes a good investing entry point.
To be sure, this likely won't be the only investment you ever make. As you gain experience, you may want to try funds with higher risk levels, such as those that track growth companies or emerging markets. But the Vanguard Utilities ETF can get you started immediately, allowing you to grow your money with far less worry.
