Index funds can be some of the most cost-effective ways for investors to get broad exposure to everything from the general market to a small subset of international stocks that can be difficult for the average investor to buy. And depending on your investment goals, there's probably an index for you.
We asked five of our contributors to highlight their top index fund to buy this month, and Vanguard Emerging Markets Stock Index Fund (NASDAQMUTFUND:VEIE.X), Vanguard FTSE Emerging Markets ETF (NYSEMKT:VWO), iShares Russell 2000 ETF (NYSEMKT:IWM), Schwab US Broad Market ETF (NYSEMKT:SCHB), and Vanguard Total Bond Market ETF (NASDAQ:BND) were at the top of the list.
Making small-cap stocks easy to own
John Rosevear (Schwab U.S. Small-Cap ETF): The case for small-cap stocks probably needs no introduction, but just in case: Small companies can provide outsized growth, albeit with volatility that is typically higher than that of the overall market. I'd argue that most long-term portfolios will benefit from some indexed small-cap exposure.
Charles Schwab's U.S. Small-Cap ETF is relatively new, but it's no slouch. It tracks the Dow Jones U.S. Small Cap Total Stock Market Index, which gives it a little bit of a bias toward larger (but still small) stocks versus funds that track the more commonly used Russell 2000 Index, such as the widely owned iShares Russell 2000 ETF (NYSEMKT:IWM).
That bias toward companies with somewhat larger market caps makes for somewhat smoother sailing than other small-cap index funds. The fund's recent performance has benefited from the strength of mid-cap companies as a group, though that could shift over time. Nearly all of the fund's holdings (over 98%) are in U.S. stocks.
With a net expense ratio of just 0.05% of assets and a low portfolio turnover ratio of 11%, the fund is inexpensive to own. It's a nice low-cost way to add some well-diversified small-cap exposure to your portfolio.
It's always a good time to dollar-cost average into a low-cost broad index ETF
Chuck Saletta (Schwab US Broad Market ETF): The Schwab US Broad Market ETF (NYSEMKT:SCHB) holds the distinction of being the lowest-cost broad-based index ETF I could find. With an expense ratio of a mere 0.03% and a low 5% turnover rate, it's a low-cost, low churn way to get exposure to a broad swath of the US stock market.
The Schwab US Broad Market ETF aims to track the Dow Jones Broad US Stock Market Index, which contains 2,500 of the nation's largest companies by market capitalization. If, like most people, you don't have the time or inclination to research and build a portfolio of individual stocks, dollar-cost averaging into a low-cost stock-based index fund is a great way to build your retirement account.
If you're following that dollar-cost averaging strategy, then you'll want to put money into your investment account every payday and buy your stake in the fund. That's true whether you believe the market is currently overvalued, fairly valued, or has room to run. In a dollar-cost averaging strategy, you'll buy more shares when the market is cheap but fewer when it's expensive -- but over time, you should wind up with a rate of return near the overall index you're tracking.
As a result, you shouldn't expect to outperform the overall market with the Schwab US Broad Market ETF, but it still has the potential to be a great wealth building tool over time.
A low-cost way to invest abroad
Brian Feroldi (Vanguard Emerging Markets Stock Index Fund): With the S&P 500 regularly hitting new highs, there is an argument to be made that investors need to look elsewhere for value. Thankfully, the last few years haven't been kind to investors in emerging markets, which makes right now a good time to considering looking abroad. If that sounds like a winning idea then I'd suggest you consider buying the Vanguard Emerging Markets Stock Index Fund.
This fund offers investors instant access to more than 4,300 businesses that operate in high-growth countries such as India, Taiwan, China, Brazil, and Russia. By holding a position in so many businesses, this fund stays extremely well diversified so that shareholders do not have to be overly concerned when any given business or country goes through hard times. I also like that the median market capitalization across all of the fund's holdings is $12.8 billion, which means that it is not overly concentrated in small-cap businesses. Income investors will also like that the fund offers up a dividend yield of 2.13%. And despite offering all of these benefits, the fund's expense ratio is only 0.32%, which is dirt cheap.
The only downside to this index fund is that Vanguard requires you to invest at least $3,000 upfront to get in. If you don't have that much money to invest but you are still interested, considering buying the ETF version of the fund known as the Vanguard FTSE Emerging Markets ETF (NYSEMKT:VWO). While you might have to pay a commission to buy shares, you will gain all of the benefits of this fund, and you will pay a lower expense ratio of only 0.14%. For high net worth individuals, there is also an admiral version of the fund that offers a lower expense ratio if you can handle the $10,000 minimum investment requirement.
Get the portfolio income you want
Dan Caplinger (Vanguard Dividend Appreciation): Dividend stocks have been extremely popular lately, as many investors want a combination of portfolio income and share-price appreciation potential from their investments. The Vanguard Dividend Appreciation ETF offers investors a great vehicle for getting exposure to dividend stocks, with an emphasis that makes the dividend ETF slightly different from most of its peers.
The Vanguard Dividend Appreciation ETF doesn't just focus on stocks that have the highest yields. Instead, it looks for companies that have put together an impressive track record of growing their dividend payouts steadily over time. Many of the stocks that the Vanguard dividend ETF owns have been boosting their dividends year in and year out for decades, and that gives long-term investors a steadily rising amount of dividend income that they can use to match the impact of inflation on their expenses and corresponding cash needs.
Moreover, Vanguard Dividend Appreciation's price can't be beat. With an expense ratio of just 0.09%, you'll pay next to nothing for the simple dividend stock exposure that the ETF provides. If you're looking for a low-cost way to get the dividend income you need, Vanguard Dividend Appreciation can provide a good long-term solution.
The stock full of bonds
Travis Hoium (Vanguard Total Bond Market ETF): My four Foolish colleagues above have focused on some great index funds that follow a variety of segments of the stock market. But index funds can give investors exposure to bonds as well, without the hassle of trying to buy corporate or government bonds directly. The Vanguard Total Bond Market ETF is not only a great way to get exposure to the broad world of bonds, it's also an extremely low fee fund, with an expense ratio of just 0.06%.
The goal of the fund is to give exposure to a broad range of U.S. investment grade bonds and match their returns long-term. From a performance standpoint, that means the value of the ETF will fluctuate based on the ups and downs of bond values, rising when rates go down and falling when rates go down. But the payoff is a yield that currently stands at 2.42%, paid by the coupon received from bonds the fund owns.
Long-term, the ETF has been much less volatile than the broader stock market, which is a feature of owning investment grade bonds. And with a solid dividend payment this is a great way for investors to get some bond exposure. This won't be an investment that crushes the market, but if stocks go through a rough spell this is a lower risk investment that should preserve capital better than most stock funds.