Index funds tick two important boxes for investors. Since they aren't professionally managed, for one, they tend to have much lower fees than your average mutual fund. These investments also provide instant diversification by virtue of their wide portfolios.
With those attractive characteristics in mind, we asked Motley Fool investors to highlight a few of the most attractive index funds. Read on to find out why Vanguard Information Technology (NYSEMKT:VGT), Vanguard Total Stock Market Index (NYSEMKT:VTI), and Vanguard Health Care Fund (NASDAQMUTFUND:VGHCX) all made the list.
Betting on big tech
Dan Caplinger (Vanguard Information Technology): Technology stocks have been on fire lately, leading the overall market sharply higher. Yet investing in high-flying tech companies can seem like a dangerous move, especially if you're a risk-averse investor who can't afford to see a major decline in the value of your portfolio. Choose the wrong stock, and you could suffer a complete loss.
That's where the value of exchange-traded funds can come in. Vanguard Information Technology gives you exposure to the biggest names in the technology industry, but the ETF also has a great deal of diversity that includes hardware, software, internet, social media, cloud computing, data analytics, and other key specializations. You can get stakes in more than 350 different tech stocks through a single fund. Moreover, the fund goes beyond simply traditional tech companies, incorporating stocks in areas like financial technology. Recent moves to switch to a different index will invite even greater opportunities for expansion into areas like streaming video.
Best of all, it doesn't have to cost an arm and a leg to get the investment exposure you want. With an expense ratio of 0.10%, you'll pay just $10 annually on a $10,000 investment. That's a small price to pay for a diversified tech investment that will keep you in one of the most exciting sectors of the market.
Own the entire market
Demitri Kalogeropoulos (Vanguard Total Stock Market ETF): Why worry about beating the market when you can simply own it all? The Vanguard Total Stock Market ETF accomplishes this goal by delivering exposure to essentially all U.S. stocks traded on the NYSE and the Nasdaq. That's why it's the place where I park most of the portfolio cash that I haven't directed toward individual stocks.
This fund has just about everything you might want from a stock index investment. It is broadly diversified, which means you'll always match the overall market's returns. Fees are minuscule at 0.04%. And there's very little turnover to worry about, as just about 3% of the portfolio is bought or sold in any given year.
You'll need to pair this investment with other index funds if you want total diversification since it doesn't include bonds, real estate, or a stake in many of the biggest international companies. Another key risk to consider is that, because the fund is market weighted, its performance is sensitive to the results of a few massive U.S. companies such as Apple and Amazon.com. If you own significant portions of these stocks already, just understand that this exposure is amplified by your owning an index fund like this.
Still, given that many investors, including Wall Street pros, trail the broader market, it's great to know that you can avoid that fate with a simple purchase of this stock market fund.
Investing in healthcare the smart way
George Budwell (Vanguard Health Care Fund Investor Shares): Healthcare is in the midst of unprecedented upswing, thanks to an aging global population, broader health insurance coverage, and an astonishing innovation boom across medical devices, pharmaceuticals, and even electronic medical records systems. As a result, healthcare as a whole has outperformed most other sectors by a wide margin since the start of 2010.
Even so, it's not always easy picking individual companies in this extremely volatile space. Changes in the political landscape, regulatory delays, or clinical setbacks, after all, can cause individual stocks to plummet on a moment's notice.
Fortunately, there are several highly diversified funds like the Vanguard Health Care Fund Investor Shares out there that offer a simple way to invest in this high-growth sector with far less risk than choosing individual stocks.
The Vanguard Health Care Fund Investor Shares, for example, is an actively managed fund that comes with a bargain-basement expense ratio of only 0.38% at current levels. The fund's closest peers, by contrast, average a far higher expense ratio of 1.25%.
Perhaps the best part, though, is that the fund's low-risk approach to capital appreciation has proven to be an excellent way to invest in healthcare. Since its inception, for example, the fund's total return on capital has absolutely trounced that of the broader markets.
So, if you're looking for a top healthcare fund to keep you in the investing game, Vanguard Health Care Fund Investor Shares should definitely be on your list.