The best index funds can help you build wealth by diversifying your portfolio while minimizing your fees. Investing in an index fund is less risky than investing in individual stocks or bonds because index funds often hold hundreds of securities. Index funds spread your investment risk across the stocks or bonds of many different individual companies.
Choosing an index fund
Choosing an index fund
Index funds hold baskets of investments to track a market index, such as the S&P 500 (SNPINDEX:^GSPC). Index funds are passively managed, meaning that the fund's holdings are entirely determined by the index that the fund tracks. The goal of an index fund is to match the performance of the underlying index. They're a good choice for long-term investors because you can lock in the returns of the overall stock market or a specific segment of it.
The returns generated by an index fund generally never exceed the performance of the index itself, if only because of index fund expense ratios, which are the annual management fees collected by index fund managers. Since index funds are passively managed, they are actually more likely over the long term to outperform funds with active managers.
An index fund can either be a mutual fund or an exchange-traded fund (ETF). Investors buy shares of mutual funds directly from asset management companies; shares in ETFs are purchased and sold through stock exchanges.
Exchange-Traded Fund (ETF)
Consider these key factors when picking an index fund to invest in:
- Target market segment: Some index funds confer portfolio exposure to the entire U.S. stock market by tracking indexes such as the S&P 500, while other index funds track narrower indexes that focus on specific stock market sectors, industries, countries, or company sizes.
- Your investment goals: Some stock market indexes, and, by extension, some index funds, track companies with specific characteristics such as high growth potential, a history of reliable dividend payments, or adherence to environmental, social, and governance (ESG) standards.
- Expense ratio: An index fund's expense ratio, which is the percentage of your investment that is annually paid as a management fee to the index fund's manager, can vary significantly. A good expense ratio for a total stock market index fund is about 0.1% or less, and a small number of index funds have expense ratios of 0%. More specialized index funds tend to have higher expense ratios.
- Minimum required investment: Some mutual funds have minimum investments of $1,000 or more. ETF index funds are accessible for the cost of a single share. Many brokers also offer ETFs as fractional shares, allowing you to invest for as little as $1.
- Benchmark tracking performance: How closely an index fund tracks its underlying index can vary. The performances of the best index funds are very closely correlated with their benchmark indexes.
9 best index funds for 2023
Nine best index funds for 2023
Our picks for the nine best index funds for this year can help you accomplish a variety of investment goals. Plus, they have low expense ratios and low minimum investments.
After a rocky 2022, many of the funds listed below are up significantly during the first half of 2023. But remember: Index investing is about building wealth for the long haul, so try not to focus on short-term ups and downs.
Funds 1-3
1. Fidelity ZERO Large Cap Index Fund
Investing in S&P 500 index funds is perhaps the closest thing to a guaranteed way to build wealth over time. The Fidelity ZERO Large Cap Index Fund (FNILX -0.41%), which tracks an index of more than 500 U.S. large-cap stocks, performs very similarly to an S&P 500 index fund. But because this fund is not an official S&P 500 index fund, it avoids paying expensive licensing fees to S&P Global (SPGI -1.66%), the index's parent company. The fund tracks the Fidelity U.S. Large Cap Index as its benchmark.
The "ZERO" in the fund's name denotes that the expense ratio for this fund is 0%. There's also no minimum investment amount, making the fund a good choice for beginning investors.
The fund moves in near-lockstep with the S&P 500. As of mid-September 2023, its returns since its inception in September 2018 were 66.35%, just shy of the S&P 500's return of 66.44% during the same period. Through Sept. 18, 2023, the fund was up 18.06% this year, slightly more than the S&P 500.
2. Schwab S&P 500 Index Fund
If you want to invest in an official S&P 500 index fund, then the Schwab S&P 500 Index Fund (SWPPX -0.48%) is about the cheapest you'll find. Its expense ratio is 0.02%, meaning you'd annually pay just $0.20 for every $1,000 you invest. Because the investment fee is so low, your returns are virtually identical to the performance of the S&P 500. There's no minimum investment amount, so you can start investing with as little as $1.
In 2022, the fund fell by more than 18%, almost identical to the S&P 500's losses for the year. As of September 2023, both the fund and the S&P 500 had total returns of about 17% for the year.
3. Vanguard Growth ETF
If you want to assume more investment risk in the pursuit of higher rewards, then the Vanguard Growth ETF (VUG 0.36%) is a solid choice. The fund tracks the CRSP US Large Cap Growth Index, which performs similarly to the S&P 500 Growth Index. The ETF invests in 235 U.S. large-cap growth stocks.
Tech stocks are heavily represented, accounting for 52% of the fund's holdings as of Aug. 31, 2023, followed by consumer discretionary stocks (21%) and industrial stocks (9.4%). Consumer staples and utility stocks each make up less than 1% of the fund's value.
The ETF has a minuscule 0.04% expense ratio. As of Aug. 31, 2023, the fund's average annual return over five years (before taxes) was more than 13%, compared to about 11% for the S&P 500 over the same period.
Funds 4-6
4. SPDR S&P Dividend ETF
A top-performing index fund for income-oriented investors is the SPDR S&P Dividend ETF (SDY -1.46%). The dividend-weighted fund's benchmark is the S&P High Yield Dividend Aristocrats® Index, which tracks 121 of the stocks in the S&P Composite 1500 Index with the highest dividend yields. All of the companies owned by the ETF have increased their dividend payments annually for at least 25 consecutive years.
Dividend-paying stocks tend to be less volatile compared to the overall stock market. So it isn't surprising that the SPDR S&P 500 Dividend ETF finished 2022 down less than 3%, significantly less than the 18% drop the S&P 500 experienced. However, since the beginning of 2023, the fund has delivered a total return of negative 2.34%, while the S&P 500 has had positive returns of more than 17%.
The fund's 30-day SEC yield as of September 2023 was 2.61% -- almost double the S&P 500's 1.48%. The expense ratio is also somewhat higher at 0.35%.
The fund's top five holdings are 3M (MMM -1.27%), International Business Machines Corp. (IBM -0.86%), biopharmaceutical company Abbvie Inc. (ABBV -4.32%), real estate investment trust (REIT) Realty Income Corp. (O -1.59%), and Chevron Corp. (CVX -6.72%). Several REITs, which typically pay high dividends because they're required to disburse at least 90% of their taxable incomes, are included in the fund. The ETF is underweighted in tech stocks, which don't tend to pay generous dividends.
5. Vanguard Real Estate ETF
If you want to invest across the real estate market, the Vanguard Real Estate ETF (VNQ -1.6%) is a solid, low-cost option. With an expense ratio of 0.12%, it's also by far the largest real estate index fund, with total net assets of almost $62 billion.
Its benchmark index is the MSCI US Investable Market Real Estate 25/50 Index, which broadly tracks the U.S. real estate market. Although the index includes a few real estate management and development companies, it consists mostly of equity REITs, which own and operate income-producing real estate.
Because it invests primarily in REITs, the ETF is also attractive to dividend investors. The fund's 12-month dividend yield as of Sept. 18, 2023, was 4.58%. The Vanguard ETF may also appeal to investors concerned about inflation since real estate is traditionally seen as a hedge against rising prices elsewhere.
6. Vanguard Russell 2000 ETF
The Vanguard Russell 2000 ETF (VTWO -1.19%), which tracks the Russell 2000 (RUSSELLINDICES:^RUT), is a good place to start for investors who want to take advantage of the potential upside of investing in small-cap companies. The fund invests in 2,006 small- and mid-cap companies that have a median market capitalization of $2.6 billion.
As of Aug. 31, 2023, the index fund's largest concentrations were in industrials (18.5%), health care (14.9%), and financials (14.8%). The fund's expense ratio, at 0.1%, is relatively low, especially for one that offers exposure to the companies with the most growth potential.
Like its benchmark index, the Vanguard Russell 2000 ETF underperformed the S&P 500 during the first eight months of 2023, rising about 9% vs. 17% for the S&P 500.
Funds 7-9
7. ROBO Global Robotics and Automation Index ETF
Thematic investors who want to capitalize on a long-term secular trend should check out the ROBO Global Robotics and Automation Index ETF (ROBO -0.53%). The index fund's benchmark is the Robo Global Robotics and Automation Index, which tracks 78 companies in robotics, automation, and artificial intelligence. It has more than $1.3 billion in total net assets. Its expense ratio is 0.95%, more than any index fund on this list.
The ETF offers investors a way to capture the growth of several booming trends. Robotics offers huge cost savings to companies; the industry is forecast to have a compound annual growth rate of 14.7% through 2032. Interest in AI stocks has also surged at the start of 2023, especially given the rise of ChatGPT. As of mid-July, the ETF was up almost 18% year to date, slightly outperforming the S&P 500.
Artificial Intelligence
8. Schwab Emerging Markets Equity ETF
If you're seeking to diversify your portfolio through exposure to high-growth emerging markets but don't want your risk concentrated in a single economy or region, the Schwab Emerging Markets Equity ETF (SCHE 0.17%) may be a good fit. It tracks the FTSE Emerging Index, a collection of large- and mid-cap stocks in more than 20 developing countries. The fund has 1,928 holdings, with the largest concentrations in China, India, Taiwan, Brazil, and Saudi Arabia. Its expense ratio is only 0.11%.
The stocks of companies in emerging markets have historically underperformed compared to U.S. stocks. Between 2013 and 2022, the Schwab emerging market funds, on a combined basis, had total returns of about 16%. The S&P 500, meanwhile, racked up total returns of more than 226%. Through mid-September 2023, the fund also underperformed the S&P 500 with total returns of slightly more than 4%.
Still, considering that about 85% of the world's population lives in developing countries, investors with a long-term focus who are comfortable with volatility may want to seriously consider investing in this fund.
Related investing topics
9. Fidelity U.S. Sustainability Index Fund
Investors who are interested in sustainable investing should check out the Fidelity U.S. Sustainability Index Fund (NASDAQMUTFUND:FITL.X). The fund's benchmark is the MSCI USA ESG Leaders Index, which tracks the performances of large- and mid-cap domestic stocks with above-average ESG ratings. The index fund has a low expense ratio of 0.11% and no minimum investment amount.
The fund's largest concentrations, as of Aug. 31, 2023, were in the technology (28.5%), healthcare (12.9%), and financials (11.9%) sectors. The sustainability ETF's top holdings are Microsoft (MSFT 0.59%), Nvidia (NVDA 0.43%), Google parent Alphabet (GOOG -0.03%)(GOOGL -0.09%), Tesla (TSLA 0.75%), and Eli Lilly & Co. (LLY -1.39%).
Although ESG funds are appealing to those who want to invest with a conscience, a strong ESG focus is also good for returns. Companies that pose little ESG-related risk often deliver superior financial performance, making ESG funds such as the Fidelity U.S. Sustainability Index Fund a good choice for long-term investors.
FAQs about index funds
What is the highest-rated index fund?
There's no single highest-rated index fund. The best index fund will vary based on your investing goal. For example, if you're seeking investment income, the SPDR S&P Dividend ETF or the Vanguard Real Estate ETF would be good options; if you're looking for a higher-risk, higher-reward fund, you may consider a growth-focused fund, like the Vanguard Growth ETF.
What is the safest index fund?
All investments carry some risk, but S&P 500 index funds have been a historically safe investment for the long term, since the S&P 500 has always delivered positive returns over long time periods.
What is the best index fund for the S&P 500?
To choose the best S&P 500 index funds, look for a fund that closely tracks the index's performance and has low investment fees. By these measures, three of the top S&P 500 index funds are the Fidelity 500 Index Fund (NASDAQMUTFUND:FXAIX), Schwab S&P 500 ETF, and the Vanguard S&P 500 ETF (NYSEARCA:VOO).
Is Vanguard the best index fund?
Vanguard isn't an index fund; it's an investment company that creates and markets index funds, along with other financial products and services. However, Vanguard is a leader in providing low-cost index funds.