Top 5 Index Funds to Buy and Hold Forever!
These 5 index fund ETFs are favorites among investors
Why Index Funds?
This article I wrote below talks about Index Funds and the benefits to them. To summarize, index funds allow you to be exposed to a wide variety of stocks that track the overall performance of the stock market or certain indices, such as the Dow or S&P 500, with much less risk than picking individual stocks.
The Criteria
Low Expense Ratio, Fees charged per year to hold the index fund, every fund has these.
Passively Managed, meaning that fund managers are not actively trading in and out of certain stocks in the fund.
Widely Diversified, not in one sector such as Tech, Energy, etc.
10+ years old
5. Dow Jones Industrial Average ETF (DIA)
Expense Ratio: 0.16
Current Price: $306.74
Dividend Yield: 1.80%
The Dow Jones Industrial Average ETF (DIA) tracks the famous Dow 30 index, one of the oldest indexes used in the stock market. The Dow Jones is made up of 30 stocks that rarely change and are considered safe, “blue-chip”, stocks. Fun fact, Chevron has been in the Dow since 1930, the current longest tenured member of the Dow, with Proctor and Gamble a close second, being added in 1932.
The Dow Jones is the most referenced metric when measuring stock performance, and it is in part due to the steady gains it has achieved over its lifetime. Generally less volatile than its S&P 500 and Nasdaq counterparts, investing in the Dow Jones through DIA gives you access to what many see as the best 30 companies in the United States stock market, which consistent returns since its inception.
4. Invesco QQQ (QQQ)
Expense Ratio: 0.20
Current Price: $284.85
Dividend Yield: 0.75%
Invesco QQQ (QQQ) tracks the Nasdaq 100 index, and is heavily weighted towards tech. In fact, its top 10 holdings make up over 51% of the index. Its top 5 holdings are Apple, Microsoft, Amazon, Tesla, and Alphabet. This has been one of the best performing index funds recently due to the explosion in tech valuations.
One downside of this index fund is the volatility. Of the Dow, S&P 500, and Nasdaq, the Nasdaq is the most volatile. This is due to its heavy concentration not only in its top 10 holdings, but towards the tech category. Holding QQQ while the market is up will generally yield outsize returns, but can be painful to stomach on the way down.
3. Schwab US Dividend Equity ETF (SCHD)
Expense Ratio: 0.06
Current Price: $71.11
Dividend Yield: 3.10%
Schwab US Dividend Equity (SCHD) tracks the Dow Jones US Dividend Index, which is an index that tracks companies with a long track record of dividend growth. Its top 5 holdings are Merck, Verizon, Cisco Systems, IBM, and Amgen. Its top 10 holdings make up just over 41% of the index.
This index fund is perfect for income and dividend investors who want stability in their returns and dividend income. This has been one of the best performing indexes over the last 5 years, even without dividends being reinvested, which would significantly boost returns above the market average of 10% per year. This index fund is generally less volatile than the QQQ and other index funds, moving up slowly but also not dropping as dramatically in market volatility.
2. Vanguard Total Stock Market ETF (VTI)
Expense Ratio: 0.03
Current Price: $189.08
Dividend Yield: 1.39%
When it comes to diversification, no index fund does it better than VTI. The Vanguard Total Stock Market ETF, VTI, tracks the entire United States stock market. VTI’s top 5 holdings are Apple, Microsoft, Amazon, Alphabet, and Tesla. While these stocks are also the top 5 holdings of the Nasdaq, the top 10 holdings of VTI only make up 22% of its entire holdings. VTI holds 4112 stocks, from big tech companies to small cap companies that you may have never heard of.
Many people prefer this index over the S&P 500 due to its immense size and exposure to every single type of stock. VTI has over $1 trillion in assets under management, making it larger than most companies in the world, and the single largest passively-managed ETF in the world.
1. Vanguard S&P 500 ETF (VOO)
Expense Ratio: 0.03
Current Price: $357.24
Dividend Yield: 1.45%
“Consistently buy an S&P 500 low-cost index fund,” Buffett said in 2017. “Keep buying it through thick and thin, and especially through thin.” Warren Buffett is a famous advocate for buying the S&P 500 through an index fund, as it is the best 500 companies America has to offer. I choose VOO over SPY, both track the S&P 500, because of the slightly cheaper expense ratio.
The top 5 holdings of VOO are Apple, Microsoft, Amazon, Alphabet, and Tesla (see a theme here?). The top 10 holdings of VOO account for just over 26% of the entire index. It is incredibly hard to beat the S&P 500 over a long period of time, which is why it is often recommended that investors stick to buying this fund, and forget about it.
Conclusion
While all these index funds offer great portfolio diversification, buying multiple diversified index funds can help balance the performance of your portfolio. An example of this would be owning QQQ along with something like SCHD, so that you can have the out-performance of tech with the safety of dividend returns. Passively managed index funds can be great to build long-term wealth and to never have to worry about under-performing or out-performing the stock market itself. While there are many other index funds to choose from, always be sure you are picking the best low-expense, highly diversified option available.