Though the process of picking individual stocks can be a financially rewarding endeavor, it can also be time-consuming and often requires a stomach for volatility. With that in mind, index funds offer another compelling way to maximize your returns while providing diversification through broad market exposure.
So we asked three top Motley Fool contributors to each choose an index fund they believe investors would be wise to consider buying this month. Read on to see why they chose Vanguard Mix-Cap Index Fund (NASDAQMUTFUND:VIMSX), Vanguard Health Care ETF (NYSEMKT:VHT), and SPDR S&P Oil and Gas Exploration & Production index ETF (NYSEMKT:XOP).
Not too big, not too small...
Steve Symington (Vanguard Mid-Cap Index Fund): I've pounded the table more than once for investors to consider buying shares of low-cost index funds that mirror the returns of the S&P 500, which is comprised of 500 of the largest U.S. businesses and stands the most popular gauge of the country's stock market performance. But for investors who don't mind enduring a little more risk for a higher potential reward, I also think the Vanguard Mid-Cap Index Fund is worth considering.
More specifically, the Vanguard Mid-Cap Index Fund offers broad exposure to mid-capitalization stocks in the U.S. -- or those loosely defined as companies valued in the range of $2 billion to $10 billion. These businesses offer a compelling combination of growth potential that much larger companies don't enjoy, but without quite as much volatility as investors in small-cap stocks often need to endure.
Its performance since inception (on May 21, 1998) speaks for itself, as the VIMFX's total returns have trounced the S&P 500.
Perhaps best of all, the Vanguard Mid-Cap Index comes with an ultra-low 0.2% expense ratio, which is 82% lower than the average expense ratio of other funds with similar holdings. In the end, I think there are plenty more market-beating returns in store for investors who buy this index fund now and let the power of compounding do its work over the long term.
Two big long-term trends have this fund positioned for decades of strong returns
Jason Hall (Vanguard Health Care ETF): There is a pretty significant trend already under way in the U.S., with an average of 10,000 Baby Boomers reaching retirement age every passing day. And since the youngest Boomer won't reach age 65 for another dozen years, that's a lot of Americans growing older. This major trend makes Vanguard Health Care ETF a must-own for long-term investors. This is especially true when you also factor in that Baby Boomers are remaining more active in retirement than prior generations, and are likely to live longer as well, benefiting from the advances in healthcare technology and treatments in recent years.
But that's only part of the opportunity, because it's not just aging Americans that will increase healthcare spending in coming decades. The world's middle class is exploding. Over the next 20 years, there will be as many as 2 billion more middle class consumers, with the means and access to better medical care.
Since its inception, this fund, which tracks the MSCI US Investable Market Health Care 25/50 Index, has soundly outperformed the S&P 500. Between the retirement trend in the U.S., and the explosion of the middle class around the world in coming decades, it's far more likely than not that this index fund will continue to outperform the market for years to come.
Profit from inventory build
Todd Campbell (SPDR S&P Oil and Gas Exploration & Production index ETF): You probably already know that promises of supply cuts by OPEC and Russia have helped prop up crude oil spot prices lately, but what you might not realize is that historically, crude oil production and gasoline production bottom early in the year, and then build into spring ahead of the summer driving season.
The following chart from 2010 to 2014 comes courtesy of the U.S. Bureau of Labor Statistics, and it provides insight into the seasonality associated with the refinery switch-over to summer-grade gas, and the necessary pre-summer inventory build due to it.
What's potentially more interesting than the seasonal uptick in oil production is that there is, historically, a corresponding seasonal response in stock prices. While history may not repeat again this year, it's -- at a minimum -- intriguing to note that the SPDR S&P Oil and Gas Exploration & Production index ETF's best months for average returns have been February, March, and April, over the past decade.
Given that this index has retreated from its recent highs, it remains well below its historical highs, and crude spot prices are far north of where they were a year ago, I think there's a good chance that those who buy shares in the XOP this month will end up being rewarded.