Whether you're an investing rookie or an experienced investor, index funds have something to offer for one and all. Not only do index funds offer you the benefits of diversification, but they also allow you to invest in stocks without having to spend time researching or monitoring your portfolio.
With so many great options around, our contributors believe three index funds, in particular, could make for great investments because of the kind of exposure they offer: Vanguard Total International Stock Index Fund (NASDAQMUTFUND:VGTSX), Vanguard Short-Term Bond ETF (NYSEMKT:BSV), and Vanguard 500 Index Fund (NASDAQMUTFUND:VFINX).
Be a part of the global growth story
Neha Chamaria (Vanguard Total International Stock Index Fund): One great way to diversify your portfolio is to buy U.S. stocks and international index funds. But when you talk about international exposure, more often than not, investors end up buying emerging market index funds. However, international markets overall have been doing particularly well lately, so an even better option would be to gain exposure to emerging and developing economies around the world. Vanguard Total International Stock Index Fund offers just that.
As its name suggests, this index fund tracks stock markets across the globe outside the U.S. As of April 20, 2017, Europe made up 44.1%, Pacific 29.4%, and emerging markets 19.3% of the fund's portfolio. If you think the heavy exposure to Europe would've dented the fund's performance given the uncertainties surrounding the economy in recent years, consider that the fund has returned nearly 53% in the past five years.
I see two big reasons for the fund's outstanding performance: First, it owns some of the biggest brands, including Nestle, Samsung Electronics, Novartis, Royal Dutch Shell, Toyota Motor, and Unilever. Second, it's a huge fund with more than 6,000 stocks -- yes, you read that right -- in its portfolio. Combine that with the fact that the fund tracks several stock markets, and I see little chance for it to tumble or underperform for a long period of time unless most of the global markets plunge into recession.
The best part is the Vanguard Total International Stock Index Fund breaks the myth that international exposure comes at a big cost: Unlike most emerging market funds, this fund has a significantly low expense ratio of 0.18%. This fund is, perhaps, one of the best ways to gain leverage to international markets today.
Yields on cash are as important as expense ratios
Jordan Wathen (Vanguard Short-Term Bond ETF): I've recommended a super-safe bond index ETF not because I think you should run off to sell all your stocks, but because I think a lot of investors would do well to optimize the cash they hold in their portfolios. Consider it spring cleaning.
Investing your spare capital is a billion-dollar business for many of the industry's biggest brokerage firms. One company in the industry reports that its clients hold up to 14% of their balances in cash at any given time, generating billions in interest income for the brokerage, which pays its clients 0.01% per year and invests their money at 1%-2%.
Rather than let your broker get rich from your money, consider using a super-safe bond ETF like the Vanguard Short-Term Bond ETF as a cash equivalent. The average bond in the index will mature in less than three years, and roughly two-thirds of its assets are government or government-backed securities. Despite its super-safe portfolio, it currently yields about 1.6% per year, or 160 times more than your broker is likely paying you on cash.
Admittedly, this tip isn't for everyone. Some people keep virtually nothing in cash. Others don't have enough cash sitting around to justify paying a commission to buy and sell a bond ETF (Note: many online brokers have a short-term bond ETF on their list of commission-free ETFs).
That said, earning higher yield on a portfolio with a 10% cash position makes as much of a difference as shaving 0.16% off your portfolio's average expense ratio. If you'd shop around to cut your fund fees by 0.16% -- and most people would do so -- you should be willing to expend a little effort to boost the returns on your cash, too.
If you can't beat 'em...
Steve Symington (Vanguard 500 Index Fund): Building a portfolio of high-quality individual stocks is arguably the best way to predictably create wealth over the long term. However, if you don't have the time or inclination to research individual stocks, but still want to participate in the stock market's long-term appreciation -- the S&P 500 has historically achieved annual gains of roughly 10% -- the best way to do so is by putting your money to work in a low-cost index fund that's meant to mirror the returns of the broader market.
One of the very best options to that end is the Vanguard 500 Index Fund, the goal of which is to match the S&P 500's returns. But like other index funds from Vanguard, the Vanguard 500 Index Fund offers an ultra-low annual expense ratio of 0.14% -- a tiny fraction of the 0.5% to 1% charged by most similar funds. That might not sound like much, but over the course of many years keeping those extra fees in your brokerage account (instead of filling the coffers of those managing the index fund) will go a long way toward allowing your returns to compound more quickly.
To be fair, note this isn't the first time I've suggested investors buy shares of a Vanguard 500 Index Fund or ETF. But keeping in mind the vast majority of actively managed funds don't beat the S&P 500's returns anyway, you can be sure this won't be the last time I pound the table for this low-cost, highly convenient option to enjoy the best of what our stock market has to offer.
Jordan Wathen has no position in any stocks mentioned. Neha Chamaria has no position in any stocks mentioned. Steve Symington has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Nestle and Unilever. The Motley Fool has a disclosure policy.