While we Fools love to hand-pick stocks, we realize that not everyone has the time or inclination to do the same. For these investors, index funds can be a great alternative.
So which index funds do we think could be a great addition to any portfolio? We asked a team of diehard investors to weigh in, and they picked ProShares S&P 500 Dividend Aristocrats (NYSEMKT:NOBL), Vanguard Total International Stock Index Fund (NASDAQMUTFUND:VGTSX), and the NASDAQ Biotechnology Index ETF (NASDAQ:IBB).
An honorable choice
Jeremy Bowman (ProShares S&P 500 Dividend Aristocrats): Dividend stocks have been shown to historically outperform non-dividend-payers, as the former tend to hold up much better in bear markets, and if you reinvest dividends in a Drip plan, you can get even higher returns.
With that in mind, an index fund made entirely of dividend payers, especially ones that have a track record of increasing dividends for more than 25 years in a row, should be an excellent choice for investors seeking a stable investment that will outperform the market. Over the past 10 years, the S&P 500 Dividend Aristocrats index has posted an average annual total return of 11.55%, compared with 8.08% for the S&P 500, and with lower risk.
ProShares S&P 500 Dividend Aristocrats offers investors the opportunity to invest in an index exclusively made up of S&P 500 Dividend Aristocrats, or stocks that have raised their dividend payout for 25 years in a row. With a 2.4% dividend yield, this fund may not have the highest yield investors can find, but it's higher than the S&P 500, and you can count on the payout increase up each year.
Since its debut in 2013, ProShares S&P 500 Dividend Aristocrats has returned 55.5%, which trails the S&P 500 by a few points, but it should outperform in a down market as the broader index has done. It contains more than 40 components, each of which are similarly weighted, with consumer staples making up the biggest sector. As the end of September, the biggest components were AbbVie, Genuine Parts, Chevron, and Brown-Forman, though none took up more than 2.3% of the fund.
Based on the long-term performance of the Aristocrats, this looks like a safe, reliable way to boost your returns.
Gain access to big international brands at low costs
Neha Chamaria (Vanguard Total International Stock Index Fund): There are plenty of index funds with exposure to the U.S. stock markets, but if you really want to diversify your portfolio, you must check out Vanguard Total International Stock Index Fund -- a well-balanced fund that owns stocks in both developed and emerging markets of the world and is up a solid 25% year to date.
As of Oct. 31, Europemade up 43.5%, Pacific 29.6%, and emerging markets 19.9% of the index fund's portfolio. That the fund delivered such solid performance this year despite the ongoing challenges in Europe points to its strong portfolio of stocks. To name a few, its top 10 holdings as of Oct. 31 included big brands such as Samsung Electronics, Royal Dutch Shell, Nestle, Tencent Holdings, HSBC Holdings, Unilever, and Novartis.
Aside from big brand names, I can see another reason behind the Vanguard Total International Stock Index Fund's steady growth: the size of its portfolio, which constitutes a whopping 6,270 stocks with a net asset value of $315.6 billion as of the last count. Such a hugely diversified portfolio is unlikely to underperform unless a global recession hits every market, sector, and industry.
You don't even have to shell out much to own the fund; its expense ratio is just 0.18%. That's dirt cheap when compared with an average 1.08% expense ratio for similar funds.
In all, given the ongoing strength in key international markets and its cost advantage, the Vanguard Total International Stock Index Fund's growth may have just started.
A safer way to play biotech
Brian Feroldi (NASDAQ Biotechnology Index ETF): The biotech sector is not for the faint of heart. On the plus side, a company can produce life-changing results for its shareholders if it develops a game-changing drug. However, investors can also get wiped out when a key compound gets tossed in the dustbin.
Given these realities, I think that it makes sense to take a basket approach to the sector. One easy way to do so is with the Nasdaq Biotechnology Index ETF. This one fund owns 159 biotech stocks, which makes it incredibly well diversified. What's more, this ETF keeps a large portion of its capital in biotech stocks that are large and highly profitable, such as Biogen, Amgen, Gilead Sciences, and Celgene. That helps to keep a lid volatility.
This may sound like a simple strategy, but history shows that it works. Take a look at this fund's performance since its inception in 2001:
With plenty of promising drugs still in development, this fund stands a great chance of continuing to outperform over the long run. Yet all of this goodness can be had for a modest expense ratio of only 0.46%. That makes this fund a great candidate for some of your long-term capital.
Brian Feroldi owns shares of Celgene. Jeremy Bowman has no position in any of the stocks mentioned. Neha Chamaria has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Celgene, Gilead Sciences, Nestle, and Tencent Holdings. The Motley Fool recommends Biogen. The Motley Fool has a disclosure policy.