While we love individual stocks, low-cost index funds can be an important part of nearly anyone's portfolio. Whether it's simplifying how you invest, increasing your exposure to a particular industry, or focusing on a specific objective, index funds serve key roles for millions of investors.
We asked three of our top contributors to write about an index fund they think is particularly compelling now, and they offered up Financial Select Sector SPDR Fund (NYSEMKT:XLF), iShares Edge MSCI Minimum Volatility USA ETF (NYSEMKT:USMV), and Vanguard 500 Index Fund (NYSEMKT:VOO).
Keep reading below to learn if -- and why -- one of these three index funds could be ideal for you to buy this month.
Financial industry could do well going forward
Jason Hall (XLF): With the election of Donald Trump to the White House, America's biggest banks and financial institutions may have just sighed a big sigh of relief, since it almost guarantees that financial regulation won't be getting any more stringent anytime soon. And in the near term, this is likely to be good for the Financial Select Sector SPDR Fund.
Furthermore, the underlying equities held in this fund, which is composed of the 66 S&P 500 components in the financial services industry, looks to be trading at a decent value today. The index trades at a price-to-earnings ratio below 14, compared with nearly 25 for the S&P 500 components at recent prices. XLF also trades at about 1.2 times book value, borderline cheap for high-quality banks and financials.
So if it's increased exposure to financials you're looking for, this this low-cost index fund might be the perfect fit.
Reduce your exposure to volatility
Dan Caplinger (USMV): The stock market has gotten a lot more volatile in the past few months, with causes for concern ranging from the presidential election to global economic worries and the potential for an end to the long U.S. economic recovery. Some investors mistakenly choose to get out of stocks entirely when faced with higher volatility, but another strategy to consider is picking a fund that focuses on lower-volatility stocks. iShares Edge MSCI Minimum Volatility USA ETF is the largest such fund by assets under management, with investors trusting more than $12 billion to the fund's managers.
The iShares minimum volatility fund focuses on large-cap stocks that have historically had lower volatility than the rest of the U.S. stock market. The index that the fund tracks has proprietary methods to make estimates of future volatility, and the fund's prospectus notes that the result primarily includes components in the financials, healthcare, and information technology sectors. With an expense ratio of 0.15%, the iShares fund follows this strategy inexpensively, and it has actually outpaced the broader market's return by a considerable margin over the past three years. Investors shouldn't count on that always being the case, as less volatility would typically result in giving up performance during bull markets in exchange for smaller losses in bear markets. Still, for those who are nervous about the stock market's future, the iShares fund is a way to hedge some of your bets while keeping exposure to stocks.
If you can't beat the market, join it
Steve Symington (VOO): It's hard to understate the convenience, affordability, and admirable long-term performance investors can enjoy by purchasing shares of a straightforward, low-cost index fund. You'll be hard pressed to find one better than the Vanguard 500 Index Fund.
The Vanguard 500 Index Fund tracks the S&P 500 index, which itself is composed of 500 of the largest U.S. businesses and arguably represents the best gauge of overall U.S. stock market performance. As such, the fund sports a solid annual dividend yield of 1.98% as of this writing. And perhaps most importantly, the Vanguard 500 Index Fund comes with an ultra-low expense ratio of 0.05% -- a far cheaper annual fee to put your money to work than the roughly 1.03% average annual expense ratio its peers command.
Of course, investing in a fund meant to mirror the broader market's returns means you technically can't expect to beat the market -- at least by any meaningful margin. But in an age when the majority of professional investors and hedge fund managers already vastly underperform this lofty benchmark, I think the Vanguard 500 Index Fund is an ideal place to put money to work for investors who don't have the time or inclination to research individual stocks.