There are good reasons why index funds are incredibly popular investment vehicles. After all, they deliver instant diversification at extremely low costs. They also tend to outperform most managed funds over long time periods.
Below, our Motley Fool investors highlight three of their favorite index funds: iShares MSCI Capped ETF (EWW 0.05%), Vanguard High Dividend Yield (NASDAQMUTFUND: VHDYX), and Vanguard Small-Cap Growth Index (VISGX 1.90%). Each could make a great investment option today as broader markets bounce along near record highs.
Image source: Getty Images.
Head south of the border
Jeremy Bowman (iShares MSCI Capped ETF): My vote goes to the Mexican exchange-traded fund iShares MSCI Capped ETF. It's hard to find a better-performing index fund this year as it has jumped nearly 30% this year as fears of a Trump presidency and a U.S. protectionism have proven to be overblown. The index fund has steadily gained as the Mexican economy bounces back and the peso recovers from lows following the election.
However, there should be plenty of room for the rally to continue as the peso remains elevated at 18 pesos to $1, and iShares MSCI Capped ETF is still well below its highs reached a few years ago.
Mexico raised its economic growth outlook to 1.5%-2.5% in May, and political tensions should continue to thaw over the coming years as American companies have come to increasingly depend on Mexican labor.
With significant positions in stocks like America Movil, the country's leading telecom; CEMEX, one of North America's biggest cement companies; and Wal-Mart de Mexico, the retail giant's subsidiary, this ETF will give investors ample exposure to growth south of the border.
At an expense ratio of 0.48%, the index fund isn't the cheapest one you'll find, but it will give investors a chance to tap into the current rally in Mexico as well as an emerging market that should offer solid long-term returns.
Go small or go home
Travis Hoium (Vanguard Small-Cap Growth Index Fund): The small-cap growth segment of the stock market can offer some of the biggest long-term gains to investors but some massive risks as well. And picking the right stock can be very difficult. That's why Vanguard Small-Cap Growth Index Fund is a great way to get exposure to small companies with growth, but also capture diversity that single stocks can't offer.
Image source: Getty Images.
The top 10 holdings of this fund makes up just 5.6% of its total assets, giving a glimpse of how diverse exposure is in this fund. And in that top 10, investors get exposure to Diamondback Energy, Vail Resorts, Zillow Group, and Take-Two Interactive. That diversity and set of industry-leading small caps is what investors should love about this fund.
It shouldn't be overlooked that these companies aren't going to be as stable as a high-yield dividend fund or a large-cap fund, but they'll provide investors with more growth. The paltry dividend yield of 0.8% is also nothing to write home about, but that's not the point of growth stocks. If you're looking for a way to stay in the growth stock game but don't want to risk your financial future on a few hot tech stocks, Vanguard Small-Cap Growth Index Fund is a great index fund pick.
Sprinkle in a few high-yielders
Demitri Kalogeropoulos (Vanguard High Dividend Yield): Investors who prefer dividend stocks should consider an income-focused fund like Vanguard's High Dividend Yield index. This fund is comprised of slower-growing blue-chip stocks that pay higher yields than the market average. It includes over 400 dividend stocks, and two of its top holdings are Procter & Gamble and General Electrics, which both pay above 3%.
The index fund overall currently yields 2.97%, or roughly a full percentage point higher than an investor could get by simply buying a broad total stock market fund. It charges very low fees, too, with expenses weighing in at just 0.15%.
Keep in mind that you're likely trading some capital appreciation potential for that higher cash return. In fact, the prospectus warns that the emphasis on elevated yields should cause the investment to trail broader market indexes, especially in significant bull markets. That's exactly what's happened recently, given that the Vanguard High Dividend fund's total return over the past five years has been about 10 percentage points below the market's.
SPY Total Return Price data by YCharts.
Conversely, this investment should hold up better during flat or down markets, which could come at any time. That's why it makes sense to include a mix of strong dividend payers in your portfolio, and this fund helps you accomplish that objective with a single, low-cost purchase.
