Investing in high-quality stocks over the long term is the most effective way to generate wealth. But not everybody has the time or inclination to adequately research individual stocks in order to make the best possible buying decisions.
That doesn't mean you should be scared out of the market, though. With the caveat that you shouldn't buy stocks with money you need within the next five years, index funds are a great way to put your cash to work in a diversified basket of equities to meet a variety of goals.
But not all funds are created equal. To help get you started, we asked three Motley Fool investors to each pick an index fund to keep you in the investing game. Read on to learn why they chose the Vanguard 500 Index Fund (VFINX 0.41%), Guggenheim China Technology ETF (CQQQ -0.03%), and the Vanguard REIT ETF (VNQ 2.46%).
Just buy the market
Steve Symington (Vanguard 500 Index Fund): You'll see my colleagues have opted to pitch sector-specific index funds below -- and with good reason. But before you get there, I'd be remiss if I didn't remind you that, for most people, buying a piece of the broader stock market is often the best and simplest way to stay in the investing game. Built to mirror the S&P 500, the Vanguard 500 Index Fund is a great way to do so with minimal overhead costs.
After all, the vast majority of actively managed funds consistently underperform the S&P 500, which has delivered historical annual returns of roughly 10%. And when the market does pull back, the diversification it offers should help mute some of the even steeper losses you might incur otherwise by holding a small number of individual stocks.
What's more, the Vanguard 500 Index Fund comes with a tiny annual expense ratio of 0.14% compared to a full 1% average expense ratio charged by most other funds with similar holdings. That might not seem like much, but keeping those costs in your pocket will only serve to help further accelerate your compounding gains over the years.
Keep up with tech growth in China
Keith Noonan (Guggenheim China Technology ETF): Investing in ETFs minimizes your risk profile by diversifying into a range of companies -- but that doesn't mean that it can't also be a good way to pursue growth. The Guggenheim China Technology ETF tracks the Alphashares China Technology Index and stands out at as one of the best ways to quickly build a position in the Middle Kingdom's rapidly growing tech industry. As an indication of how this momentum is translating into market-beating returns for investors, the Guggenheim China Technology ETF notched gains of roughly 72% in 2017 compared to a roughly 19% increase for the S&P 500 across the stretch.
The fund bundles together 79 distinct securities, with its top holdings by weight consisting of industry leaders Tencent Holdings, Baidu, Alibaba, Netease, and 58.com. That's an assortment that gives investors broad exposure to China's information-technology sector, as well as the chance to benefit from trends powering explosive growth in the country.
Today, roughly 40% of Chinese citizens have annual disposable incomes of less than $2,100, but the Economist Intelligence Unit expects that the portion of the population in that bracket will drop to just 11% in 2030. Somewhere around 40% of China's population also is not yet connected to the internet, creating a long-term growth catalyst for the country's tech industry as more and more people get web access. Also promising is the fact that many of China's tech leaders have the potential for big growth outside of their domestic market.
For investors looking to benefit from tech-sector momentum in one of the world's fastest-growing economies, Guggenheim's China Technology ETF looks like a winning play.
One of 2017's worst-performing sectors could be a long-term bargain
Matt Frankel (Vanguard REIT ETF): Despite an incredibly strong stock market in 2017, the real estate sector was a major laggard, held down by rising interest rates, among other factors. Going into 2018, investing in real estate investment trusts (REITs) could be a good value for long-term investors who want to take advantage of the weakness.
In a nutshell, real estate investment trusts are a unique type of investment company. They're required to distribute at least 90% of their taxable income to shareholders, and in return, are not taxed at the corporate level. And they make great total return investments, with the ability for significant long-term growth in addition to generating above-average income.
The Vanguard REIT ETF is my favorite real estate index fund, with its rock-bottom 0.12% expense ratio. The fund tracks the MSCI U.S. REIT Index, which contains about 150 equity (property-owning) REITs, weighted by market cap. Top holdings include mall REIT Simon Property Group, data center REIT Equinix, and industrial REIT Prologis, to name just a few.
The fund's current yield is 3.5%, allowing investors to take advantage of the high-dividend nature of REITs. It's worth noting, however, that most REIT dividends generally don't qualify for the favorable tax treatment that "qualified dividends" get, so this ETF is best utilized in a tax-advantaged account like an IRA.
In a nutshell, the Vanguard REIT ETF gives you exposure to all different subsectors of commercial real estate -- retail, residential, office, industrial, hotel, healthcare, and more -- and allows you to take advantage of the income and growth potential of REITs without the guesswork or risk involved with choosing individual REITs.
The bottom line
There's no way to guarantee that these three funds will generate satisfactory returns going forward. But whether it's participating in the market's movement with the Vanguard 500 Index, betting on the strength of tech stocks in China with the Guggenheim China Technology ETF, or counting on the rebound of REITs with the Vanguard REIT ETF, we like their chances of doing just that in the coming years.