Index funds are popular with investors because they promise ownership of a wide variety of stocks, immediate diversification and lower risk – usually all at a low price. That’s why many investors, especially beginners, find index funds to be superior investments to individual stocks.
Among the best are index funds based on the Standard & Poor’s 500 Index (S&P 500). The index includes the largest, globally diversified American companies across every industry, making it as low-risk as stock investing gets. Of course, as the start of 2020 has shown, even the whole market can fluctuate dramatically.
This index is the very definition of the market, and by owning a fund based on the index, you’ll get the market’s return. It’s also among the most popular indexes.
Here’s everything you need to know about index funds and five of the top index funds to consider adding to your portfolio this year.
What is an index fund?
An index fund is a fund – either a mutual fund or an exchange-traded fund (ETF) – that is based on a preset basket of stocks, or index. This index may be created by the fund manager itself or by another company such as an investment bank or a brokerage.
These fund managers then mimic the index, creating a fund that looks as much as possible like the index, without actively managing the fund. Over time the index changes, as companies are added and deleted, and the fund manager mechanically replicates those changes in the fund.
Because of this approach, index funds are considered a type of passive investing, rather than active investing where a manager analyzes stocks and tries to pick the best performers. This passive approach means that index funds tend to have low expense ratios, keeping them cheap for investors getting into the market.
Some of the most well-known indexes include the S&P 500, the Dow Jones Industrial Average and the Nasdaq 100. Index funds are a popular strategy for ETFs to use, and virtually all ETFs are based on indexes.
Why are index funds so popular?
Investors like index funds because they offer immediate diversification. With one purchase, investors can own a wide swath of companies.
For example, one share of an index fund based on the S&P 500 provides ownership in hundreds of companies. While some funds such as S&P 500 index funds allow you to own companies across industries, others allow exposure to a specific industry, country or even investing style (say, dividend stocks).
The S&P 500 index fund continues to be among the most popular index funds. S&P 500 funds offer a good return over time, they’re diversified and they’re about as low risk as stock investing gets. Like all stocks, it will fluctuate, but over time the index has returned about 10 percent annually. That doesn’t mean index funds make money every year, but over long periods of time that’s been the average return.
So here are some of the best index funds for 2020. These funds are based on the S&P 500 or contain many of the stocks in that index.
Best index funds for May 2020
The list below includes S&P 500 index funds from a variety of companies, and it includes some of the lowest-cost funds trading on the public markets. When it comes to an index fund like this, one of the most important factors in your total return is cost. Included are two mutual funds and three ETFs:
- Fidelity ZERO Large Cap Index
- Vanguard S&P 500 ETF
- SPDR S&P 500 ETF Trust
- iShares Core S&P 500 ETF
- Schwab S&P 500 Index Fund
1. Fidelity ZERO Large Cap Index (FNILX)
The Fidelity ZERO Large Cap Index mutual fund is part of the investment company’s foray into mutual funds with no expense ratio, thus its ZERO moniker. The fund doesn’t officially track the S&P 500 – technically it follows the Fidelity U.S. Large Cap Index – but the difference is academic. The real difference is that Fidelity doesn’t have to cough up a licensing fee to use the S&P name, keeping costs lower for investors.
Expense ratio: 0 percent. That means every $10,000 invested would cost $0 annually.
2. Vanguard S&P 500 ETF (VOO)
As its name suggests, the Vanguard S&P 500 tracks the S&P 500 index. It has $44 billion in assets, as of March 2020, making it one of the largest funds on the market. This ETF began trading in 2010, and it’s backed by Vanguard, one of the powerhouses of the fund industry.
Expense ratio: 0.03 percent. That means every $10,000 invested would cost $3 annually.
3. SPDR S&P 500 ETF Trust (SPY)
The SPDR S&P 500 ETF is the granddaddy of ETFs, having been founded all the way back in 1993. It helped kick off the wave of ETF investing that has become so popular today. As of Apr. 2020, it had $265 billion in assets, ranking it among the most popular ETFs. The fund is sponsored by State Street Global Advisors — another heavyweight in the industry — and it tracks the S&P 500.
Expense ratio: 0.09 percent. That means every $10,000 invested would cost $9 annually.
4. iShares Core S&P 500 ETF (IVV)
The iShares Core S&P 500 ETF is a fund sponsored by one of the largest fund companies, BlackRock. With nearly $185 billion in assets (as of Apr. 2020), this iShares fund is one of the largest ETFs and like other large funds, it tracks the S&P 500. With an inception date of 2000, this fund is another long-tenured player.
Expense ratio: 0.04 percent. That means every $10,000 invested would cost $4 annually.
5. Schwab S&P 500 Index Fund (SWPPX)
With nearly $35 billion in assets (as of Apr. 2020), the Schwab S&P 500 Index Fund is on the smaller side of the heavyweights on this list, but that’s not really a concern for investors. This mutual fund has a strong record dating back to 1997, and it’s sponsored by Charles Schwab, one of the most respected names in the industry. Schwab is especially noted for its focus on making investor-friendly products, as evidenced by this fund’s razor-thin expense ratio.
Expense ratio: 0.02 percent. That means every $10,000 invested would cost $2 annually.
These are some of the best S&P 500 index funds on the market, offering investors a way to own the stocks of the S&P 500 at low cost, while still enjoying the benefits of diversification and lower risk. With those benefits, it’s no surprise that these are some of the largest funds on the market.