10 Index Funds Every Investor Needs in Their Portfolio

Buying index funds has long been a way for ordinary people to outperform Wall Street’s best and brightest in the stock market. They are a simple, efficient, and effective way to get market-like returns without the hassle, costs, and churn associated with active trading or hiring professional money management.

As the popularity of index investing has exploded, so have the areas of the market that index funds track. That gives you an incredible opportunity to use index funds to invest in different sectors, always getting the advantages that indexing brings while still focusing on areas that are of interest to you.

With that in mind, here are 10 index funds that every investor needs to consider for part of their portfolio.

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When people talk about the stock market in general, they’re often really talking about the S&P 500. An index of around 500 of the largest U.S.-based companies, the S&P 500 was the first major index to get an index fund.

Today, there are a plethora of funds that track that index, but the SPDR S&P 500 ETF Trust (NYSEMKT: SPY) stands out as a venerable member of that group that’s worthy of your consideration.

As an exchange-traded-fund (ETF), you can buy or sell shares of it any time the market is open, and with a tiny 0.09% expense ratio, you’ll get nearly all the benefits of owning the underlying companies.

If there’s one potential problem with traditional index funds, it’s that they tend to be market-capitalization weighted. As a result, the largest companies get the largest share of the fund and any investment in it.

That can be a problem, as the top 10 companies (represented by 11 stocks due to dual-class shares), represent around 30% of the index by market capitalization. Should one of those companies happen to stumble, an index investor would see a bigger impact than he or she may have expected, due to that top-heavy concentration.

That’s where the Invesco S&P 500 Equal Weight ETF (NYSEMKT: RSP) comes in handy. It owns shares of the same companies as a traditional S&P 500 fund, but it splits its investments just about evenly between each of the companies in the index. That gives it a much lower concentration risk while preserving most of the benefits of index investing.

If, like Warren Buffett, you’re generally bullish on America, why limit yourself to just 500 of the largest companies in the country? With the Vanguard Total Stock Market ETF (NYSEMKT: VTI), you can get your hands on a portion of virtually every market-listed, publicly traded stock that’s based in the U.S.

If you want some exposure to smaller companies without giving up the relative financial stability that larger companies often bring, then the Vanguard Total Stock Market ETF is worth considering. A one-stop-shop with a mere 0.03% expense ratio, it’s an easy and inexpensive way to invest in America.

ALSO READ: Warren Buffett on America

As great as those previous indexes might be, they are all dominated by larger companies. The challenge that brings is that it’s tough for the biggest companies to grow very fast.

With that in mind, the Vanguard Small Cap ETF (NYSEMKT: VB) tracks the CRSP U.S. Small Cap index, which focuses on smaller businesses that, presumably, have more potential to grow faster.

With a tiny 0.05% expense ratio, investors in the fund get nearly all the benefits of owning the underlying companies, without the hassle of buying them individually.

The fund does have about a 22% annual turnover ratio, which is fairly high for an index fund. That reflects the dynamic nature of small caps -- and just might be another reason to own the fund instead of trying to recreate it on your own.

Of course, the global economy is much larger than just the United States. If you’re interested in owning stocks that cover the world, consider the Vanguard Total World Stock Index ETF (NYSEMKT: VT). An index fund that tracks the FTSE Global All Cap index, the Vanguard Total World Stock Index ETF provides the ultimate exposure across market capitalizations and countries.

With an expense ratio of 0.08%, the fund provides that global reach at a very low price tag. In addition, with a mere 6% turnover, its global exposure enables the fund to rarely have to trade to keep pace with the index it tracks.

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For many Americans, owning shares in U.S.-based companies comes somewhat naturally -- either as part of their direct compensation or as one of the available options in their 401(k) plans. If you’re in that situation -- or if you just want to invest in the rest of the world -- then the Vanguard Total International Stock Index Fund (NASDAQ: VXUS) is worth considering.

The fund has a tiny 0.08% expense ratio and a 7% annual turnover, making it an efficient and inexpensive way to get international exposure with a single purchase.

ALSO READ: Investing in International Stocks

Historically, investing in real estate has been considered as a reasonable hedge against inflation. After all, once you purchase land and a facility, many of your costs become fixed, but the rents you can charge will often rise in response to inflationary pressures.

That makes the iShares Core US REIT ETF (NYSEMKT: USRT) worth looking into. That index fund carries a small 0.08% expense ratio, has a small 5% turnover, and tracks the FTSE NAREIT Equity REITs Index. That means it owns shares in companies that are focused on owning real estate and are structured as Real Estate Investment Trusts.

As a result, this EFT gives you a low cost, low-churn way to focus on real estate without the hassles of directly being a landlord.

Utilities are typically known as “widows and orphans” stocks, as their heavily regulated nature tends to make them fairly predictable performers from an operational perspective. If you believe that trend will continue, then the Utilities Select SPDR Fund (NYSEMKT: XLU) may be worth taking a look at.

That ETF has a reasonable 0.12% expense ratio to go along with a mere 3% turnover, reflecting the relatively staid nature of the utilities business. That particular index fund tracks an index of water, power, gas, and renewable energy suppliers, making it a reasonably diversified bet on future energy demand and supply mix.

With inflation roaring back and the Federal Reserve reluctant to do much more than jawbone about it, many investors are looking for a way for their cash to have a decent chance of keeping up.

The SPDR Portfolio TIPS ETF (NYSEMKT: SPIP) might be a tempting fund to look at for money that would otherwise be losing purchasing power to the ravages of inflation.

That ETF attempts to track the Bloomberg US Government Inflation Linked Bond Index, which means it invests in Treasury Inflation Protected Securities. Those are government bonds that adjust their value annually due to inflation.

Although they adjust after the inflation hits, those costs will be reflected at some point, making them a decent place to consider for an inflation fighter. With a 0.12% expense ratio, investors should see their money pretty well reflect the performance of the underlying assets over time.

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Many investors with a long-term time horizon seek to build an income stream that grows over time. If that’s the type of strategy you’re looking for, then the Vanguard Dividend Appreciation Index Fund ETF (NYSEMKT: VIG) may be worth considering.

Although its current yield around 1.5% isn’t all that much, the fund tracks the U.S. S&P Dividend Growers index, which tracks companies with at least a 10-year history of increasing their payments annually.

While that’s not a guarantee that such performance will continue, it does focus the ETF’s holdings on companies with decent track records of increasing their dividend payments.

To the extent those businesses want and are able to continue those trends, it gives the ETF holders a chance to see their own incomes increase over time. With a tiny 0.06% expense ratio, it gives investors a chance at that performance via a one-stop-shop that has very low overhead costs.

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These 10 index funds all offer you pretty low-cost ways to access different parts of the market with a single transaction. At least one of them -- or perhaps a combination of several of them -- could play a key role in your overall portfolio, depending on what your strategy and needs are. Just be sure to recognize the niche each one fills and put it to use for that purpose.

Then, with a decently long-term focus and consistent adherence to your strategy, you’ll likely find that these index funds do a great job of delivering returns more or less in line with the sectors they track.

If history is any guide, that can better help you get closer to reaching your goals quicker than had you trusted your money to Wall Street’s best and brightest.

Chuck Saletta has no position in any of the stocks mentioned. The Motley Fool owns and recommends Vanguard Dividend Appreciation ETF, Vanguard Small-Cap ETF, Vanguard Total International Stock ETF, and Vanguard Total Stock Market ETF. The Motley Fool has a disclosure policy.