Between the risk, volatility, and research required, investing in individual stocks certainly isn't for everyone. But index funds offer a convenient way for anyone to buy stocks with built-in diversification and relatively low costs.
So we asked three top Motley Fool investors to each discuss an index fund they believe investors would be wise to consider today. Read on to learn why they like the Vanguard 500 Index Fund (NASDAQMUTFUND:VFINX), Vanguard Growth ETF (NYSEMKT:VUG), and the iShares Russell 2000 ETF (NYSEMKT:IWM).
If you can't beat it...
Steve Symington (Vanguard 500 Index Fund): It's easy to forget that the broader stock market has delivered incredible, hard-to-beat returns. That is, after all, why so many investors strive -- and fail -- to "beat the market." With that in mind, you might want to buy and hold the Vanguard 500 Index Fund.
The Vanguard 500 Index Fund is built to mirror the S&P 500's returns, and commands a minuscule 0.14% expense ratio, or roughly 85% lower than the average cost of other similar funds for their effort. Over the long term, those lower costs alone will put significantly more money in your pocket as the power of compounding returns does its work.
Of course, you'll need to come to terms with the fact that you can't beat the market by simply buying it. But considering that the S&P 500 has delivered impressive historical annual returns of around 10%, I think many investors would be best off putting their money to work in the Vanguard 500 Index Fund.
An affordable basket of high-growth stocks
Demitri Kalogeropoulos (Vanguard Growth ETF): If you're attracted to growth stocks but would like to limit your risk exposure, consider picking up shares of Vanguard Growth ETF. This fund focuses on large-capitalization U.S. companies that have a strong track record of sales, earnings, and profitability gains. A few of its top holdings today include home improvement giant Home Depot, along with tech leaders like Alphabet and Apple.
Vanguard Growth ETF checks most of the important boxes for index fund investing, including an ultra-low annual fee of 0.05%, diversification thanks to the 300 stocks in the portfolio, and low turnover that last year amounted to just 8% of the holdings. And, since it is an ETF, it's a bit easier to trade than its mutual fund counterpart.
As Vanguard warns in its prospectus, growth stocks go through periods of time during which they tend to underperform, and that's usually during those pesky bear markets that can strike out of the blue. Thus, this fund will be most at home with other stocks or index investments that cover slower-growth industries such as telecommunications, oil and gas, and consumer staples.
Small is in
Keith Speights (iShares Russell 2000 ETF): The big corporations in the S&P 500 get most of the headlines. But over the long run, it's the stocks of smaller companies -- many of which you've probably never heard of -- that perform better. Sure, individual small-cap stocks are riskier than large-cap stocks. But you can buy a couple of thousand small-cap stocks all at once to spread out the risk.
The iShares Russell 2000 ETF attempts to track the performance of the Russell 2000 index. What's the Russell 2000 index? I'm glad you asked. If you listed the top 3,000 U.S. stocks in order by market cap and only selected the bottom 2,000 of those stocks with the smallest market caps, you'd have the Russell 2000.
There are other ETFs that track the Russell 2000 index. However, the iShares Russell 2000 ETF is by far the biggest. I prefer it to the others because it has much higher liquidity, with an average daily volume of more than 19 million shares traded. The 0.20% annual expense ratio of the iShares Russell 2000 ETF is also quite reasonable.
Small-cap stocks won't beat larger-cap stocks year in and year out. But owning this ETF is a great way to add small-cap stocks to your portfolio -- and increase your chances of long-term success.