January 23, 2020
The Safest and Best Index Funds To Invest In For 2020
Not all index funds are diversified to the point of being considered top-tier. Other index funds may not be the best option for long-term investments. Remember, being an index fund doesn't automatically make an investment “good.”
Because there's a wide range of funds to choose from, investors need to cultivate financial knowledge. They need to know which funds work best for their unique needs. This rings especially true as we start 2020, a likely turbulent year for the market.
What is an Index Fund?
An index fund is a form of mutual fund. With index funds, the holdings are developed to track or match specific market indexes. The major draw to index funds is that they are a hand-off money management option. A diversified, complete portfolio with impressive dividend returns can be built using mostly index funds. Why's this? Index funds aren’t hedge funds, in that they aren’t created to try and beat the market. They also aren’t made to attempt to draw higher returns when compared to market averages. Instead, index funds attempt to become the market. This involves the purchase of stocks of all firms present on a specific index. Doing so allows the fund to mirror overall index performance. Index funds are stellar at assisting in balancing and mitigating risks in portfolios. Swings in markets tend to be far less volatile to a portfolio that's mostly index funds when compared to portfolios comprised of individual stocks.What Are The Advantages of Index Funds?
Three of the most obvious benefits of investing in index funds are lower costs, more solid returns, and broader diversification.Lower Costs
Expense ratios are annual fees that all funds charge stakeholders. Typically, they're a set percentage of total invested assets. Mutual funds that are managed actively will have high expense ratios (around one to two percent), as portfolio managers pick investments and perform buying and selling actions. Conversely, index funds are managed passively. Portfolio managers play a minimal role in management. Typical expense ratios of index funds are between 0.03 percent and 0.1 percent.More Solid Returns
Even the most well-informed, intelligent portfolio management team rarely develops actively-managed funds that beat out index funds in the long run.- Over 2018, 64.5 percent of large-cap funds failed to beat the S&P 500
- Through ten years, that number was 85.1 percent
- Over 15 years, less than 10 percent of funds beat the S&P 500
Broader Diversification
One of the most evident index fund benefits is that your funds’ portfolio is immediately diversified. This minimizes the chances that you'll end up in the red over time. A strong example is an index fund tracking the entire S&P 500. It has 500 different investments. The performance of these investments varies and fluctuates up and down over time. However, when your funds are diversified across hundreds of access, the ebb and flow are far smaller.Major Players in the Index Fund Game
There are two leading players in the index fund game: Vanguard and Fidelity. In fact, 19 of the top 25 index funds derive from one of these two providers, per Market Watch. Combined, Vanguard and Fidelity have over $8 trillion in AUM (assets under management). To put that into perspective, $8 trillion is more than the gross domestic product of Japan and Germany combined. Below is a list of some of the most robust funds in both Vanguard and Fidelity. A few of these make our best-of list below for the best index funds in 2020.Best Vanguard Index Funds
- Vanguard Dividend Growth Investor (VDIGX)
- Vanguard Dividend Appreciation ETF (VIG)
- Vanguard Short-Term Investment-Grade Investor (VFSTX)
- Vanguard Limited-Term Tax-Exempt Investor (VMLTX)
- Vanguard Health Care Investor (VGHCX)
- Vanguard Wellington Investor (VWELX)
Best Fidelity Index Funds
- Fidelity ZERO Large Cap Index (FNILX)
- Fidelity ZERO Extended Market Index (FZIPX)
- Fidelity ZERO International Index (FZILX)
- Fidelity Strategic Dividend & Income (FSDIX)
- Fidelity Select Biotechnology Portfolio (FBIOX)
- Fidelity Mid Cap Enhanced Index (FMEIX)
The Best Index Funds For 2020
As of late, many index funds and exchange-traded funds (ETFs) have come to the market. However, it’s essential not to be fooled that these are secure long-term investments. Most of these funds are focused on narrower sectors of industries. This includes MLPs, online media, and biotech. This narrow focus provides stable potential returns in the short term. However, they're also vulnerable to massive drops if their industry is negatively affected. They also tend to experience far higher expense ratios compared to broader funds. 2020’s best index funds will be those that are diverse and inexpensive to maintain. Below are our recommendations.
S&P 500 Based Index Funds
S&P 500 index funds are the closest thing to a gold standard in the United States. They contain 500 stocks representing the largest companies in the country by market capitalization. These funds are a stellar indicator of the overall performance of the market. FUSEX, VFIAX, and SWPPX are the three strongest S&P 500 focused index funds.- FUSEX (Fidelity Spartan 500 Index Fund): As noted above, Vanguard and Fidelity are the best fund management platforms in existence. FUSEX is the competitive alternative to the below Vanguard option. This competition leads to lower expenses.
- VFIAX (Vanguard 500 Index Fund, Admiral Shares): VFIAX is the next level branch of VFINX, the very first index fund ever made available publicly. This fund was brought to the market by Jack Bogle. He wanted to ensure the public had access to low-risk, low-expense investment strategies.
- SWPPX (Charles Schwab S&P 500 Index Fund): For a long time, Charles Schwab has been focused on providing their clients more than just standard discount brokerage services. This option is a strong middle-ground between the Fidelity and Vanguard options above. SWPPX has a 0.02 percent expense ratio and no required minimum investment.
Total Market Based Index Funds
At times, five-hundred large market cap stocks aren’t enough diversity for some investors. In cases such as this, the advent of total stock market funds has made a wider variety of stocks available. Total market-based index funds invest in an enormous number of stocks. This includes a good mix of small-cap, mid-cap, and large-cap options. For 2020, the best total market-based index funds are provided by Schwab and Vanguard.- VTSAX (Vanguard Total Stock Market Fund): This represents the largest mutual fund in existence. This level was reached with good reason. It was the first total stock market fund and introduced the concept of extremely low expense ratios for brokerage options.
- SWTSX (Schwab Total Stock Market Fund): Charles Schwab’s total stock market fund SWTSX has an even lower expense ratio than Vanguard’s option. It’s a stellar, high-performing index fund centered on the total market. Unlike Vanguard, the Schwab option has no minimum buy-in, ideal for those just starting out, or investors on a budget. The expense ratio of SWTSX is 0.03 percent.
Aggressive Index Funds
If you're a long-term investor, you likely won’t be too concerned with occasional market fluctuations. In short bursts, your portfolio balance will increase and decrease, but will typically, over time, increase. However, if you’re looking to make some good money in the short term and are willing to take a bit of a gamble, aggressive index funds may be the perfect option. They are typically high-reward and high-risk index fund options. The best aggressive index funds are VIGAX, FNCMX, and VIMAX.- VIGAX (Vanguard Growth Index Fund): Vanguard’s growth-focused index fund centers around large-cap stocks with strong potential for growth. This makes them a bit risky compared to other index fund options. However, they can also be far more rewarding over time when compared to the S&P 500 funds. VIGAX has a 0.05 percent expense ratio, and a $3,000 minimum investment.
- FNCMX (Fidelity NASDAQ Composite Index): Fidelity’s NASDAQ composite fund is mostly large-cap options, focused on technology and health. These stocks tend to provide a strong growth potential over time and are one of the best index funds for 2020. However, this comes with some added risk. FNCMX has a high 0.29 percent expense ratio but has a smaller minimum investment of $2,500.
- VIMAX (Vanguard Mid-Cap Index Fund): While large-cap, risky stock funds are fantastic, mid-cap stocks are the next level. They are one of the best options to beat the S&P 500.
Bond Focused Index Funds
Bond focused index funds are a stellar option for everyday investors. Many who have diversified portfolios of mutual and index funds use these options. They are an excellent way to harness large swaths of the bond market. Most bond-focused funds are total bond market options, index-based ETFs, or mutual funds. They invest in the Barclay’s Aggregate Bond Index, covering a significant sector of the bond market. Two of the best options are FTBFX and VBMFX.- FTBFX (Fidelity Total Bond Index): This fund has impressive flexibility, a good balance of risk and reward. It can hold many high-yield bonds, providing the option to capture high long-term returns compared to the Vanguard option below. FTBFX has a very high 0.45 percent expense ratio and a $2,500 minimum investment.
- VBMFX (Vanguard Total Bond Market Index): This index fund is the vastest bond-focused fund currently. It's a fan favorite for self-investors and fee-only advisors. Buying VBFMX puts holders in possession of the entire US bond market. VBMFX has a slightly lower 0.15 percent expense ratio and a $3,000 minimum investment.