You wouldn't know it by the behavior of the stock market recently, but the outlook for the U.S. economy is as cloudy as a Midwest skyline before a downpour. We've moved past the spring lockdowns, but millions are still unemployed, and the COVID-19 pandemic continues to spread. The Federal Reserve isn't providing any reassurance, either; the latest statement from Federal Open Market Committee cautions that the progression of the coronavirus poses "considerable risks to the economic outlook over the medium term."

You can navigate this uncertainty in one of two ways. One, be comfortable with the risk level in your portfolio and do nothing. The market is strong now because investors are looking beyond the coronavirus crisis, and that may continue. Or, you can add stability and resilience to your holdings with a greater stake in large, well-established companies. And the simplest way to do that is to invest in large-cap index funds.

Bear figurine facing bull figurine on paper with chart.

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Advantages of large-cap index funds

Large-cap index fund investing is both a safe starting point for new investors and a defensive strategy in uncertain times. Index funds have low expense ratios and low turnover, which keeps performance close to the underlying index and minimizes your capital gains taxes. Plus, large-cap companies are among the most consistent through all economic cycles. They usually beat out smaller, younger companies with better access to capital, more experienced leadership, and a more loyal customer base.

The S&P 500 index fund

One of the most popular large-cap indexes is the S&P 500. The S&P 500 index is a basket of 500 of the largest publicly traded companies in the U.S. Investors use the index as a gage for the overall stock market.

You can easily invest in the S&P 500 with your choice of funds that track the index, known as S&P 500 index funds. Funds like Fidelity 500 Index Fund (NASDAQMUTFUND:FXAIX) or Vanguard 500 Index Fund Admiral Shares (NASDAQMUTFUND:VFIA.X) are two examples. Prominent investors including Warren Buffett and Mark Cuban have long touted the wisdom of investing in S&P 500 index funds, because these funds are diversified and perform with the market.

The other large-cap index funds

The S&P 500 isn't the only large-cap index that's investable, however. You might immediately think of the Dow Jones Industrial Average (DJIA) as an option, since this index is also referenced as an indicator of overall market performance. The trouble with investing in the DJIA is that it's a small basket of companies. With just 30 different names, the index doesn't provide much diversification. But there are two other large-cap indexes that can give you broader exposure -- the NASDAQ 100 or the Russell 1000.

The NASDAQ 100 index tracks 100 of the largest, non-financial companies that trade on the NASDAQ exchange. The index is technology focused as you'd expect, but also includes companies in the communication services and consumer cyclical sectors.

Two funds that track the NASDAQ 100 are Invesco QQQ Trust (NASDAQ:QQQ), an ETF, and USAA NASDAQ-100 Index Fund (NASDAQMUTFUND:USNQX). As shown in the table below, the QQQ ETF is the larger of the two and has a lower expense ratio, along with slightly higher returns over the last five years.

Fund Name

Expense Ratio

Net Assets

5-year Average Annual Returns

Invesco QQQ Trust ETF

0.20%

$114.66 billion

20.01%

USAA NASDAQ-100 Index Fund 

0.48%

$2.92 billion

19.67%

Data source: Fund companies.

The NASDAQ 100 has shown phenomenal growth over the last several years, thanks largely to Amazon and Apple, but it is a smaller set of companies.

If you'd like to invest in a large-cap index that's broader than the S&P 500, look to the Russell 1000. The index includes the 1,000 largest companies in the Russell 3000 index. Investing in the Russell 1000 gives you a piece of the big technology companies that make up a big part of overall the market's value, including Apple, Microsoft, and Amazon, plus positions in the healthcare, discretionary consumer products, communications, healthcare, and financial sectors.

iShares and Vanguard have ETFs that track the Russell 1000, and Schwab offers a Russell 1000 mutual fund. As you can see in the table below, all three have similar average returns over the last five years, but the iShares ETF is the largest.

Fund Name

Expense Ratio

Net Assets

5-year Average Annual Returns

iShares Russell 1000 ETF (NYSEMKT:IWB)

0.15%

$21.74 billion

11.17%

Vanguard Russell 1000 ETF (NASDAQ:VONE)

0.08%

$1.47 billion

11.17%

Schwab 1000 Index (NASDAQMUTFUND:SNXFX)

0.05%

$9.36 billion

11.14%

Data source: Fund companies.

Stabilize with large caps

A cloudy economic outlook doesn't mean the market's going sideways anytime soon. But if you are worried about it, you can play defense by increasing your stake in large caps with low-cost funds that track the S&P 500, NASDAQ 100, or Russell 1000.

 

 
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.