While we Fools love to pick our own stocks, we recognize that using index funds to gain equity exposure can be the right choice for many investors. With that in mind, we asked three of our writers to highlight index funds that they would recommend as smart choices to hold for the long term. Below, they explain why they named Schwab U.S. Small-Cap ETF (SCHA -0.75%), SPDR S&P 500 ETF (SPY -0.38%), and Vanguard FTSE All-World ex-US ETF (VEU -0.21%).
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How to own small caps without losing sleep
John Rosevear (Schwab U.S. Small-Cap ETF): A lot of older or more conservative investors tend to underweight small-cap stocks in their portfolios. That's understandable: Small caps are typically more volatile than (for instance) big blue-chip dividend stocks. But those investors miss out on the outsize growth that the stocks of smaller companies can contribute to a portfolio.
Here's one good way to buy into that growth: Invest some money in a well-run fund with diversified portfolio of small-cap stocks. Charles Schwab's U.S. Small-Cap ETF is fairly new, but I think it's an excellent choice.
One reason I like it is that it delivers small-cap exposure with a little less volatility than some of the bigger-name alternatives. The fund tracks the Dow Jones U.S. Small Cap Total Market Index, which leans it just a little bit more toward larger (but still small) stocks when compared to rival funds that track the more commonly used Russell 2000 Index, such as the popular iShares Russell 2000 ETF (IWM -0.61%).
| Asset class (stocks) | SCHA | IWM |
|---|---|---|
| Large-cap | 0.13% | 0.01% |
| Mid-cap | 19.31% | 6.13% |
| Small-cap | 60.53% | 62.60% |
| Micro-cap | 20.03% | 31.26% |
Data source: Morningstar.
That bias toward stocks with somewhat larger market caps helps to smooth out the ride over time, while still allowing the fund to deliver strong, small-cap-powered performance. Nearly all of the fund's holdings (98.7%) are in U.S. stocks, by the way, so (for a U.S. investor) there's no currency risk to worry about.
It's inexpensive to own, too, with a net expense ratio of just 0.05% and a low portfolio turnover rate of 11%. It's a nice, not-too-volatile, low-cost way to add some well-diversified small-cap exposure to your portfolio.
The market standard ETF
Travis Hoium (SPDR S&P 500 ETF): If you want to stay in the investing game with an index fund, there's no better place to start than the biggest ETF on the market. The SPDR S&P 500 ETF tracks the S&P 500 and has a whopping $244.3 billion in net assets.
What's great about a fund that mirrors a large index like the S&P 500 is that you get exposure to most of the market without betting too much on a small number of stocks. It even offers a decent dividend yield of 1.9% as well.
The biggest selling point for the fund may be its 0.0945% expense ratio. It's high fees that kill the real returns of so many index funds and mutual funds, so a low expense ratio sets this fund apart from others. Funds without SPDR S&P 500 ETF's size and simplicity won't be able to match its expense ratio, which is why its investors have a small head start on generating returns.
Investors aren't going to beat the market or strike it rich owning the SPDR S&P 500 ETF, but they can stay in the investing game. Whether you're just starting investing or have years of experience in the markets, this is a fund I think would fit well in any portfolio.
Fill your international void with just one fund
Brian Feroldi (Vanguard FTSE All-World ex-US ETF): Most investors have a home-country bias. That makes sense: Yours is the market that you know best. However, it's a big world out there, and plenty of great investment opportunities exist abroad. That's why it can be a mistake to ignore international markets.
For U.S. investors, one simple way to get into foreign markets is to buy the Vanguard FTSE All-World ex-US ETF. As its name suggests, it provides shareholders with low-cost exposure to thousands of companies located everywhere in the world except the U.S.
As the table below indicates, the fund's assets are nicely spread out across a variety of regions:
| Region | Fund allocation as of Sept. 30 |
| Europe | 44.7% |
| Pacific | 29.1% |
| Emerging Markets | 19.7% |
| North America | 6% |
| Middle East | 0.3% |
| Other | 0.2% |
Table source: Vanguard.
As with most Vanguard products, this fund features an extremely reasonable expense ratio (0.11%), and it's managed in a way that will help minimize its shareholders' tax bill (the turnover ratio is under 5%).
As if all that wasn't enough, the fund's price-to-earnings ratio is just 16, a relative bargain compared to the S&P 500's multiple of 25. Income investors will also love that the fund offers a dividend yield of 2.6%.
All in all, there are plenty of reasons for index investors to give this fund a serious look.
