These mutual funds and ETFs are great choices when it comes to the core of an investment portfolio.
It’s a well-known fact that, over long periods of time, the majority of active fund managers and stock-pickers fail to outperform the market. For example, consider the results of a recent scorecard from S&P Dow Jones Indices, which measures the performance of actively managed funds around the world against their index benchmarks.
S&P’s research found that, over the last 15 years, 89.4% of actively managed U.S. large-cap equity funds underperformed the S&P 500. Over time, the performance of actively managed funds can lag, whether due to higher fees or a change in strategy, the latter of which is called style drift. For investors with a long time horizon and a high risk tolerance, consistently contributing to and holding an index fund through thick and thin could be a solid investment strategy.
Here’s a look at the 10 best low-cost index mutual funds and exchange-traded funds, or ETFs, to buy in 2023:
- Vanguard Total Stock Market Index Fund Admiral Shares (ticker: VTSAX)
- Fidelity 500 Index Fund (FXAIX)
- Invesco QQQ Trust ETF (QQQ)
- Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX)
- iShares Core Total USD Bond Market ETF (IUSB)
- iShares U.S. Treasury Bond ETF (GOVT)
- Fidelity International Index Fund (FSPSX)
- Vanguard Emerging Markets Stock Index Fund Admiral Shares (VEMAX)
- Vanguard Total World Stock ETF (VT)
- Vanguard Balanced Index Fund Admiral Shares (VBIAX)
Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)
The pioneer of the index funds and founder of Vanguard, John Bogle, once famously said, “Don’t look for the needle in the haystack – just buy the haystack!” What Bogle meant by this was that investors shouldn’t obsess over finding the perfect stock pick. By buying an index fund, investors can instead bet on the average return of the broad market over time. A great mutual fund to put Bogle’s philosophy into play is VTSAX, which tracks a version of the Dow Jones U.S. Total Stock Market Index. VTSAX holds over 3,900 market-cap-weighted stocks from all 11 stock market sectors. When it comes to the U.S. market, this mutual fund is as diversified as it gets. Like many Vanguard Admiral Shares funds, VTSAX charges a low expense ratio of 0.04% and requires a $3,000 minimum investment.
Fidelity 500 Index Fund (FXAIX)
Bogle may like the total U.S. stock market, but Warren Buffett prefers the S&P 500. The “Oracle of Omaha” has always nursed a soft spot for large-cap U.S. companies, and no index tracks this segment of the market better than the S&P 500. Buffett is so bullish on the S&P 500 that in 2013, he disclosed that upon his passing, the majority of his estate would be invested in a low-cost S&P 500 index fund. To emulate Buffet’s example, investors can buy FXAIX. This fund has no minimum investment requirement and a rock-bottom expense ratio of 0.015%. From its inception in February 1988 through December 2022, FXAIX returned an annualized 10.25%, a testament to the strong historical performance of the S&P 500.
The S&P 500 is intended to be a fairly even representation of the U.S. market in terms of sectors. However, investors looking for concentrated exposure in a few particular sectors may find it too broad for their liking. An alternative is the Nasdaq 100 index, which tracks 101 stocks of the largest non-financial companies listed on the Nasdaq exchange. Currently, just over 50% of the index is dominated by technology companies. In addition, it’s quite top-heavy, with around 50% of its weight held in 10 mega-cap stocks like Microsoft Corp. (MSFT) Tesla Inc. (TSLA), Apple Inc. (AAPL), Amazon.com Inc. (AMZN) and Alphabet Inc. (GOOG, GOOGL). To track the Nasdaq 100, investors can buy the QQQ ETF, which is heavily traded and offers the ability to trade options. Because QQQ is an ETF, investors can trade shares throughout the day. QQQ charges a 0.2% expense ratio.
Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX)
Index funds are capable of tracking more than just equities. Bond investors looking for a low-cost core holding can make use of index funds that track an external benchmark of bonds. A possible complement to VTSAX is VBTLX, which tracks the Spliced Bloomberg U.S. Aggregate Float Adjusted Index. This fund offers exposure to U.S. government Treasurys, agency bonds, mortgage-backed securities and investment-grade corporate bonds averaging out to an intermediate maturity. The only bond types VBTLX excludes are high-yield bonds, Treasury Inflation-Protected Securities, or TIPS, and Separate Trading of Registered Interest and Principal Securities, or STRIPS. As an Admiral Shares fund, VBTLX requires a $3,000 minimum investment, but charges a low 0.05% expense ratio.
iShares Core Total USD Bond Market ETF (IUSB)
Investors who prefer their bond holdings in ETF form for greater liquidity and ease of trading can consider IUSB in lieu of VBTLX. This ETF tracks the Bloomberg U.S. Universal Index, which is a broader index than the Bloomberg U.S. Aggregate Index. The key difference between the two is the inclusion of high-yield, or “junk,” bonds in the former. These are non-investment-grade corporate bonds with credit ratings lower than BBB by S&P Global Ratings. As an investment, high-yield bonds tend to pay higher coupons, but have greater risk. However, their weighting in IUSB is limited to around 6.5%, so it won’t make too much of a difference. Nonetheless, if your objective is to track the total U.S. bond market, IUSB is as close as it gets with a single ticker. The ETF charges a 0.06% expense ratio.
iShares U.S. Treasury Bond ETF (GOVT)
With yields much higher in 2023, investors can once again rely on bonds as a source of income. However, investors who subscribe to the “bonds are for safety” strategy may not like the higher credit risk of corporate bonds. For those looking for the highest possible credit quality bond fund, a possible ETF to consider is GOVT, which only holds AAA-rated U.S. government Treasurys. Historically, Treasurys have been a “flight to safety” asset during some market crashes due to their high credit rating and liquidity. GOVT costs an expense ratio of 0.05%.
Fidelity International Index Fund (FSPSX)
U.S. stocks may have outperformed in recent years, but that wasn’t always the case. During the period between 1999 and 2009, the U.S. market stagnated as a result of both the dot-com bubble and the 2008 Great Recession. This period was known as the “Lost Decade,” and U.S.-only investors saw scant returns during that time. To mitigate this, investors can hold an allocation of international stocks via index funds like FSPSX. This fund holds market-cap-weighted stocks from developed international markets like the U.K., Germany, France, Japan, Canada and Australia. FSPSX has no minimum required investment and costs a 0.035% expense ratio.
Vanguard Emerging Markets Stock Index Fund Admiral Shares (VEMAX)
FSPSX only tracks international stocks from developed countries. This excludes countries with relatively new, but rapidly growing economies, known as emerging markets. Stocks in these countries often have low valuations and have the potential for explosive growth, but can also come with greater risks and volatility. Nonetheless, they account for a decent portion of the world’s equity markets. To track emerging market equities, investors can buy VEMAX, which holds stocks from countries like China, India, Taiwan, Brazil and Mexico. Due to the higher cost of indexing emerging market equities, VEMAX has a greater expense ratio of 0.14%. Like all Admiral Shares funds, VEMAX also requires a $3,000 minimum investment.
Vanguard Total World Stock ETF (VT)
By buying VTSAX, FSPSX and VEMAX, investors can create a globally diversified equity portfolio. However, this approach requires manually rebalancing three different funds, which can be time-consuming. For a completely hands-off approach, investors can buy VT, which holds over 9,500 market-cap-weighted equities from U.S., developed and emerging markets across all 11 market sectors. Currently, VT is around 60% U.S., 30% developed and 10% emerging markets, but this can change in the future as the world’s market composition changes. By investing in VT, investors are betting on the continued success of the global stock market, which is as diversified as it gets. VT charges a 0.07% expense ratio.
Vanguard Balanced Index Fund Admiral Shares (VBIAX)
Most investors would consider a 100% equity portfolio to be too aggressive for their risk tolerance. While a 100% equity portfolio has the highest long-term expected returns, it also comes with gut-wrenching volatility during bear markets and crashes. To temper this, investors often include a bond allocation, with a common portfolio being a balance of 60% stocks and 40% bonds. While investors can create this by pairing VTSAX and VBTLX, there’s a hands-off mutual fund that does this on your behalf. The fund to pick is VBIAX, which tracks both the Dow Jones U.S. Total Stock Market Index and the Bloomberg Aggregate Bond Index in a 60/40 allocation. The fund is self-rebalancing, which makes investing as simple as periodically buying more and reinvesting dividends. VBIAX requires a $3,000 minimum investment and charges a 0.07% expense ratio.
