At The Motley Fool, we tend to believe in active investing as market-thumping returns are truly within grasp if investors can identify incredible companies and hang on for the long term. That being said, there's still a place in every portfolio for passive indexing, which can reduce overall portfolio risk and lower costs relative to active investing.
If you're in the market (pun intended) for some index funds, here's why you should consider S&P Oil & Gas Equipment & Services ETF (NYSEMKT:XES), Vanguard 500 Index Fund (NYSEMKT:VOO), and Vanguard Telecommunications Services Index Fund (NYSEMKT:VOX).
Todd Campbell (SPDR S&P Oil & Gas Equipment & Services ETF): Oil and gas prices haven't made energy stocks very popular with investors in the past couple years, but that could be about to change. Potential spot price tailwinds from winter and historically low oil and gas rig activity could create a perfect storm that sends shares in the S&P Oil & Gas Equipment & Services ETF soaring -- especially in the wake of President-elect Donald Trump winning the White House.
Oil and gas equipment and services stocks have been in the doldrums because of production shut-ins, however, the number of rigs operating in the U.S. has climbed from a low of 404 in May to 593, and if cold winter weather helps spot prices, then the rig count could continue climbing. If so, then stocks across the oil and gas services industry should perk up.
The oil and gas equipment and services industry could benefit from Trump's pro-U.S. energy independence platform. Trump's plans include infrastructure spending, deregulation, and increased drilling, all of which could mean that this industry's worst days are behind it.
If I'm correct, then investors might want to begin warming up to these stocks again, and one way to do that is by buying a basket of the industry's biggest players, such as this index ETF.
Low costs, solid performance
Steve Symington (Vanguard 500 Index Fund): I pounded the table last month for investors to consider the Vanguard 500 Index Fund for its convenience, low costs, and admirable performance. With the holidays now upon us and the S&P 500 Index -- which the Vanguard 500 Index Fund is designed to mirror -- up less than 2% since then, I'm more than comfortable reiterating that argument.
After all, the S&P 500 is arguably the market's most well known index, and -- with its historical average annual return of roughly 10% -- for many represents the gold standard for whether your investment performance is up to par. It's also no mystery that after accounting for their often high fees, the vast majority of Wall Street's fund managers fail to match those returns. So given the Vanguard 500 Index Fund's incredibly inexpensive annual expense ratio of 0.05% (compared to the typical fee of 0.5% to 1% for most similar funds), this represents a fantastic way to keep as much of your investment in your own pockets as possible to let the power of compounding returns work its magic.
Again, keep in mind the goal the Vanguard 500 Index Fund is to match -- not beat -- the market's returns. So if you want to outperform the S&P 500, you might consider either investing in other index funds or taking the time to research and build your own portfolio of individual equity securities. But if you don't have the time or inclination to travel down those potentially market-beating paths, I still think the Vanguard 500 Index Fund is a great place to put your money to work.
The best defense is a telecommunications index fund
Evan Niu, CFA (Vanguard Telecommunications Services Index Fund): Telecommunications are an increasingly integral part of modern life, thanks in no small part to the rise of mobile devices. This is a largely defensive sector that is able to perform well even during economic downturns, since it is an arguably necessary utility for large swaths of the population. That translates into consistent cash flows and relatively predictable earnings, which in turn paves the way for healthy dividend yields. That's why I'm picking the Vanguard Telecommunications Services Index Fund, which I personally purchased in my IRA in August
The fund is concentrated entirely in the U.S. telecommunications sector, so don't expect any international exposure here. Technically, the Vanguard Telecommunications Services Index Fund tracks the MSCI U.S. Investable Market Telecommunication Services 25/50 Index, but the two largest domestic wireless carriers, AT&T and Verizon, combined comprise over 40% of the fund's assets. That's good news for the 3.2% standardized yield, while still getting some capital appreciation potential from T-Mobile (4.5% of assets) and other domestic players. With a net expense ratio of just 10 basis points, this fund is a strong candidate if you're looking for a defensive utility ETF.