Index funds are a great way for novice investors to put money to work in the markets. But with hundreds of index funds to choose from, which are the best bet for investors over the long term?
We posed that very question to a team of Foolish investors. Here's why they highlighted the Technology SPDR (NYSEMKT:XLK), the Vanguard High Dividend Yield Index Fund (NASDAQMUTFUND:VHDYX), and the iShares NASDAQ Biotechnology Index ETF (NASDAQ:IBB) as their top choices.
Growth, diversity, and low expenses -- choose three
Anders Bylund (Technology SPDR): Technology stocks offer a lot of growth potential these days, but the sector is a veritable minefield. It's easy to run afoul of poor business ideas, self-serving management teams, and other shareholder-hostile issues. One way to work around these risks is to avoid picking individual stocks at all. Technology SPDR is an exchange-traded fund that lets you ride the technology sector without committing to any particular ticker.
This fund emulates the S&P Technology Select Sector Index, which, in turn, tracks telecommunications and information technology stocks from the S&P 500 index. The index and the fund are weighted by market cap, giving a larger slice of the pie to the largest tech giants. Hence, the three largest holdings are Apple, Alphabet, and Microsoft. Each of these three household names accounts for more than 10% of the Technology SPDR's $21.6 billion in net assets, with the Alphabet stake split equally between voting Class A shares and non-voting Class C stubs.
Tied to a simple stock market index with a quarterly rebalancing schedule, this fund comes with an attractively low expense ratio of 0.13%. Technology SPDR also sports a modest 1.4% dividend yield today. It's delivered fantastic returns so far, including a compound average growth rate of 20% over the last five years.
If you're interested in the explosive gains you see in the tech sector but not willing to expose yourself to ticker-specific risks, the Technology SPDR fund lets you diversify that bet on tech stocks. Low expenses and reasonable dividends are icing on the cake.
Maximize long-term dividend income
Maxx Chatsko (Vanguard High Dividend Yield Index Fund): Investors looking to pad their retirement savings should take a closer look at the Vanguard High Dividend Yield Index Fund. Crafted to track the FTSE High Dividend Yield Index as a benchmark, the index fund boasts a 3.11% dividend yield and only requires a minimum investment of $3,000 -- below the $10,000 minimum for Vanguard's Admiral funds.
The fund provides a great way to capture dividend income and piggyback on the long-term rise of the broader stock market without wading into individual stocks. There's no denying the Vanguard High Dividend Yield Index Fund has delivered on its stated goals over the years. An investment of $10,000 made 10 years ago would now be worth $26,221 -- good for a compound annual rate of return of 10.1% in that span.
That performance is bolstered by owning a diverse range of 379 high-yield stocks in tech, energy, pharmaceuticals, financials, utilities, and more. Simply put, this is a great way for investors to de-risk exposure to a broad swath of the economy while passively collecting income, especially for individuals who might otherwise own portfolios heavily weighted to a certain industry or sector they're most comfortable with.
Betting on a megatrend
Brian Feroldi (iShares NASDAQ Biotechnology Index ETF): Recent advances in biotechnology promise to allow billions of humans to live longer, healthier lives. However, the boom-or-bust nature of the industry can make it a minefield for investors. When a company succeeds in developing a winning drug, its stock can soar. However, clinical, regulatory, or commercial failure can lead to gut-wrenching losses.
Thankfully, there are a handful of biotechnology-focused index funds that investors can use to gain exposure to this trend without having to pick their own stocks. One solid option is the iShares NASDAQ Biotechnology Index ETF. This fund owns positions in 192 different biotechnology stocks, which makes it incredibly well-diversified. At the same time, it has a heavy concentration in the biggest and most profitable biotechs in the world. It's top 10 holdings account for more than 50% of total assets and feature several cash-gushing giants such as Gilead Sciences, Amgen, Biogen, Celgene, and Illumina.
A look at the long-term returns from this fund clearly show that it has created a winning formula for shareholders:
Meanwhile, this ETF's expense ratio is just 0.47%, which is a fair price to pay for its long-term potential.
Biotechnology investing isn't for the faint of heart, but I believe that many investors could benefit from a little bit of exposure. That makes the iShares NASDAQ Biotechnology Index ETF worthy of consideration.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Anders Bylund owns shares of Alphabet (A shares). Brian Feroldi owns shares of Alphabet (A shares), Alphabet (C shares), and Celgene. Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Apple, Biogen, Celgene, Gilead Sciences, and Illumina. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Amgen. The Motley Fool has a disclosure policy.