The S&P 500 is less than 1% away from its all-time high as of this writing, and it's entirely possible that it will have broken through to a new high by the time you're reading this. With the S&P, Dow Jones Industrial Average, and Nasdaq Composite all within striking distance of record levels despite recession worries and higher-for-longer interest rates, many investors are understandably concerned about a stock market correction.
To be sure, we have absolutely no idea if we'll get a correction anytime soon or how bad it could be. It's entirely possible for the market to reach new highs and keep climbing. But if you're worried about a correction, it could be a smart idea to put some of your portfolio on autopilot with low-cost index funds.
Three top index funds to consider
To be sure, there are literally hundreds of low-cost index funds in the market. I'm generally a fan of Vanguard funds, as Vanguard (literally) invented the concept of the index fund, and still offers some of the cheapest ways to get index exposure. So here are three great choices that should perform quite well over the long term, regardless of what happens in the near future.
1. Vanguard S&P 500 ETF
The Vanguard S&P 500 ETF (VOO 0.08%), as the name suggests, is designed to track the long-term performance of the benchmark S&P 500 index. With a rock-bottom expense ratio of just 0.03%, it should track it very closely.
While it might sound boring to simply invest in the popular benchmark index and leave it alone, consider that from 1965 through 2023, the annualized total returns of the S&P 500 were over 10% -- so it can be a great way to create wealth over long time periods.
2. Vanguard High Dividend Yield ETF
If you're more of an income-seeking investor and are worried about a market correction, the Vanguard High Dividend Yield ETF (VYM -0.57%) could be a good choice for you. In a nutshell, this fund tracks an index of about 550 stocks that pay above-average dividends. Top holdings include JPMorgan Chase, Broadcom, and ExxonMobil, just to name a few.
The High Dividend Yield ETF has a low 0.06% expense ratio, meaning that just $6 for every $10,000 you have invested will go toward fees each year. With a 2.9% dividend yield, this could be a great choice for peace of mind, as well as reliable income, if the market gets rocky.
3. Vanguard Russell 2000 ETF
Last, but certainly not least, the Vanguard Russell 2000 ETF (VTWO -0.11%) tracks the most popular small-cap stock index. It is extremely diversified, and unlike the other two index funds mentioned here, it is still about 15% below its all-time high, reached in 2021.
In fact, small-cap stocks as a group are trading at their lowest price-to-book valuations relative to large caps in 25 years. Last time this happened, small caps outperformed the S&P 500 for more than a decade. There's absolutely no guarantee that it will happen the same way, but this could be a solid option for investors who don't necessarily want a fund at its all-time high.
Should you wait for a correction to buy these ETFs?
To be perfectly clear, these ETFs can make great investments right now. Even if you buy them and a correction or a full-blown market crash arrives, investors who measure their returns in decades should be just fine.
As an example, if you invested in an S&P 500 index fund at the worst possible time -- in late 2007 before the financial crisis caused the S&P 500 to fall by 50% -- you would be sitting on a 390% total return less than 17 years later.
A great way to approach ETFs like these is to slowly build a position over time by investing equal dollar amounts at a specific interval (monthly, for example). This way, you'll automatically buy more shares when the price is lower and fewer when it's more expensive.
