Best index funds for beginner investors starting to build their portfolio in 2024 is not an easy job to find. Index funds offer an excellent way to get broad market exposure in a simple, low-cost way.
As a beginner investor, looking for the best index funds can seem like trying to find a hidden treasure. It can feel confusing and overwhelming for people just starting to invest. One big problem new investors face is there are so many options to pick from, and it’s hard to know which index funds are the right ones to choose.
New investors can find the perfect index funds to get started. With patience, some learning, and a helping hand, beginners can set themselves up for a bright financial future. Selecting individual stocks can be risky, requiring constant research and a hefty change. Actively managed funds often come with high fees that eat into your returns.
What Are Index Funds?
An index fund is a type of mutual fund or exchange-traded fund (ETF) that aims to track the performance of a specific market index, like the S&P 500 or Russell 2000. Rather than having a fund manager actively pick and choose which individual stocks or bonds to invest in, the fund simply buys all (or a representative sample) of the securities in its target index.
Factors to consider when choosing an index fund
When choosing an index fund as a beginner investor, several factors can help you make a well-informed decision. One key aspect to look at is the expense ratio of the fund. This is the annual fee charged by the fund manager and can have a significant impact on your overall returns.
Another important factor to consider is the diversification offered by the index fund. Make sure to choose a fund that provides exposure to a wide range of assets across different sectors and industries. Diversification can help reduce risk in your investment portfolio.
The index fund’s track record and performance history should also be considered. Look for funds with consistent returns over time rather than chasing short-term gains. It’s also crucial to assess the fund’s underlying holdings and ensure they align with your investment goals and risk tolerance.
Consider any minimum investment requirements or additional fees associated with purchasing or selling index fund shares. Understanding these factors can help you select an index fund that suits your financial objectives and preferences as a beginner investor.
Top 6 Index Funds for Beginners
When choosing the best index funds for beginners, several options stand out for their simplicity and performance. One popular choice is the Vanguard Total Stock Market Index Fund (VTSAX), which provides broad exposure to the U.S.
The Fidelity ZERO Large Cap Index Fund (FNILX) boasts an expense ratio of 0.00%, making it an extremely cost-effective option for investors. This fund tracks the Fidelity U.S. Large Cap Index, which mirrors the performance of the S&P 500, a benchmark index widely regarded as a representation of the U.S. stock market’s performance. Notably, FNILX imposes no minimum investment requirement, offering accessibility to investors of all levels.
The Schwab S&P 500 Index Fund (SWPPX), with an expense ratio of 0.02%, is designed to mirror the performance of the S&P 500 index, providing investors with exposure to some of the largest and most established companies in the U.S.
Similarly, the Vanguard S&P 500 ETF (VOO) and iShares Core S&P 500 ETF (IVV), both with expense ratios of 0.03%, also track the S&P 500 index. These funds offer investors a simple and low-cost way to gain broad exposure to the U.S. stock market’s performance.
For investors seeking even broader exposure, the Vanguard Total Stock Market ETF (VTI) tracks the entire U.S. stock market across all market capitalizations. With an expense ratio of 0.03%, VTI provides diversification across a wide range of companies, offering investors exposure to the overall performance of the U.S. equity market.
The Fidelity 500 Index (FXAIX) and Fidelity Total Market Index (FSKAX), both with expense ratios of 0.015%, offer alternatives for investors looking to track the S&P 500 index and the entire U.S. stock market, respectively. These funds aim to replicate the performance of their respective benchmarks while keeping costs low for investors.
Additionally, the SPDR Portfolio S&P 500 ETF (SPLG) and JPMorgan BetaBuilders U.S. Equity ETF (BBUS), each with expense ratios of 0.02%, track the S&P 500 index and the Morningstar US Large-Mid Cap Index, respectively, providing investors with options for targeted exposure to specific segments of the U.S. equity market.
Lastly, the Vanguard Growth ETF (VUG), with an expense ratio of 0.04%, tracks the CRSP US Large Cap Growth Index, focusing on companies exhibiting strong growth characteristics within the U.S. large-cap segment.
Why Beginners Should Invest in Index Funds
For beginner investors who are still learning the process of how to invest and where to, index funds investment is a real choice that makes them an ideal place to start. Since index funds aim to track a market benchmark, you know exactly what you’re getting. There’s no worrying about a fund manager’s investing skills or strategy shifts impacting performance.
Even with a relatively small investment, you get broad diversification across many companies and sectors. This minimizes the risk of individual stock bets gone wrong.
Index funds tend to be less volatile than individual securities since they hold many stocks across different industries. This built-in diversification makes them beginner-friendly. There are index funds that track many different asset classes and markets, giving beginners plenty of options to build a diversified portfolio.
Build a Diversified Portfolio with Index Funds
3-Fund Portfolio for Beginners
The 3-fund portfolio is a powerful strategy for beginners seeking diversification with minimal complexity. It involves investing in just three index funds, capturing a significant portion of the global stock and bond markets. Here’s a breakdown of the concept and a brief comparison of different 3-fund portfolio options:
The core of the 3-fund portfolio consists of:
U.S. Stock Market Index Fund
Tracks a U.S. stock market index like the S&P 500 or a Total Stock Market Index.
International Stock Market Index Fund
Tracks an index of stocks from developed and emerging markets outside the U.S.
Bond Index Fund
Tracks a bond index, providing stability and income to your portfolio.
Comparison of Options
The key difference between 3-fund portfolios lies in the asset allocation (percentage invested in each fund). Here are some common options:
Aggressive GrowthThis option allocates a higher percentage (around 80%) to U.S. and International Stocks, with a smaller portion (20%) in Bonds. It offers higher potential returns but comes with greater risk.
Moderate Growth This is a balanced approach, typically allocating 60% to Stocks (split between U.S. and International) and 40% to Bonds. It offers a good balance between growth and risk.
Conservative Growth This option prioritizes stability, allocating a higher percentage (around 40%) to Bonds and the remaining (60%) split between U.S. and International Stocks. It offers lower potential returns but also lower risk.
Importance of Diversification
Diversification is a cornerstone principle of investing. It’s spreading your investments across different asset classes (stocks, bonds, real estate, etc.) and within each class (different sectors, industries, and companies). Here, I will explain why diversification is essential in index fund investment.
Reduces Risk: No single investment is guaranteed to perform well all the time. By diversifying, you’re not relying on the success of just one company or sector. If one asset class performs poorly, the others can help offset the losses.
Smooth Out Market Fluctuations: The market has ups and downs. Diversification helps smooth out these fluctuations, leading to a more stable overall portfolio performance.
Achieves Long-Term Goals: Different asset classes have different risk-return profiles. Diversification allows you to tailor your portfolio to your risk tolerance and long-term investment goals. By utilizing a 3-fund portfolio, you achieve instant diversification across a broad range of stocks and bonds, reducing risk and laying a solid foundation for your investment journey.
Best Index Funds for Taxable Accounts
If you’re investing in a taxable brokerage account, it’s wise to be tax-efficient. These index funds can be smart choices:
Vanguard Total Stock Market ETF (VTI) – This fund tracks the entire U.S. stock market across large, mid, and small-cap companies, offering incredible diversification in a single holding. The low expense ratio of 0.03%.
Vanguard Total International Stock ETF (VXUS) – Get broad exposure to developed and emerging international markets with this fund, which holds over 8,000 non-U.S. stocks and has a 0.07% expense ratio.
Vanguard Total Bond Market ETF (BND) – A low-cost way to invest in U.S. investment-grade bonds. Holding this alongside stock funds provides diversification across asset classes.
iShares Core S&P Total U.S. Stock Market ETF (ITOT) – An alternative to VTI for total U.S. stock market exposure, this iShares ETF has a 0.03% expense ratio.
Schwab U.S. Small-Cap ETF (SCHA) – For broad small-cap exposure across different sectors and industries within the U.S. Low 0.04% fee.
These mostly broader-market, total-market funds keep asset turnover low, which improves tax efficiency in taxable accounts compared to narrower funds.
Best Index Funds for Tax-Advantaged Retirement Accounts
Tax efficiency is less concern when investing in a 401(k), IRA, or other tax-advantaged retirement account. Here, building a diversified portfolio at rock-bottom costs is typically the priority:
Fidelity Zero Total Market Index Fund (FZROX) – With no expense ratio, this fund offers free total U.S. stock market exposure. Hard to beat that, especially in a retirement account.
Vanguard Total International Stock Index Fund (VTIAX) – This low-cost 0.11% expense ratio gets you internationally diversified across over 7,800 non-U.S. stocks in developed and emerging markets.
Vanguard Total Bond Market Index Fund (VBTLX) – A low 0.035% expense ratio for top bond market diversification. Hold this alongside stock funds for asset allocation.
Schwab Total Stock Market Index Fund (SWTSX) – For another total US market index at rock-bottom costs, consider this 0.03% expense ratio fund from Schwab.
iShares Core S&P Total U.S. Stock Market ETF (ITOT) – This 0.03% expense ratio ETF gives you liquid, low-cost exposure to the entire U.S. stock market in one holding.
Since these accounts are tax-advantaged, tax efficiency is less of a concern. This lets you seek the broadest diversification at the lowest cost possible.
Index Funds for Different Industries
For investors who want to extend their diversification into other asset classes beyond just stocks and bonds, here are some excellent index fund choices:
Real Estate: Vanguard Real Estate ETF (VNQ) offers low-cost exposure to real estate companies stocks, such as REITs, which should benefit from economic growth. 0.12% expense ratio.
Commodities: The iShares S&P GSCI Commodity-Indexed Trust (GSG) tracks an index of 24 different commodities across energy, metals, and agriculture. A relatively affordable 0.48% expense ratio for commodity exposure.
Long-term U.S. Treasuries: iShares 20+ Year Treasury Bond ETF (TLT) focuses on longer-duration U.S. government bonds, which can act as a portfolio diversifier to stocks.
Corporate Bonds: Vanguard Total Corporate Bond ETF (VTC) holds a broad basket of investment-grade corporate bonds across industries and maturities for a 0.05% expense ratio.
International Bonds: Vanguard Total International Bond ETF (BNDX) offers exposure to investment-grade bonds issued by governments and corporations outside the United States. 0.07% expense ratio.
Index Funds for Different Market Segments
For investors who want more targeted exposure to particular segments of the market, these narrower index funds may fit the bill:
Vanguard Information Technology ETF (VGT) – This fund focuses exclusively on holding technology stocks for those wanting concentrated tech exposure.
Vanguard High Dividend Yield ETF (VYM) – With a 0.06% expense ratio, this fund focuses specifically on stocks with relatively high dividend yields. Bright for income-focused investors.
Vanguard Small-Cap Growth ETF (VBK) – This fund isolates just the small-cap growth segment of the U.S. equity market for investors wanting to tilt towards this factor.
Schwab Fundamental U.S. Small Company ETF (FNDA) – Using an alternative weighting strategy based on fundamentals like sales and cash flow provides a novel take on small-cap exposure.
Index Funds for ESG & Socially Responsible Investing
Sustainable and ESG (environmental, social, governance) investing has grown increasingly popular, and there are some excellent index fund choices for those wanting a more socially responsible portfolio:
iShares MSCI USA ESG Select ETF (SUSA) – This ETF holds U.S. stocks from companies with high ESG ratings compared to their sector peers. 0.15% expense ratio.
Vanguard ESG U.S. Stock ETF (ESGV) – Another U.S. large and mid-cap ESG fund that excludes companies with significant exposure to fossil fuels. 0.09% expense ratio.
Focus/Impact Funds – For ESG investors who want to target specific sustainable themes, there are options like the iShares Global Clean Energy ETF (ICLN) or Vanguard Environmental Select Fund (ENVLX).
When investing with an ESG lens, it’s essential to understand the index methodology and how aggressively a fund screens and weights based on ESG factors. Some take a lighter exclusionary approach, while others have stricter requirements.
Tips for Using Index Funds as a Beginner
For new investors utilizing index funds, here are some tips to make the most of them:
- Start with broad, total market index funds as core portfolio holdings, like a total U.S. stock market fund and a total international fund. These give you immediate diversification.
- Add satellite holdings in other asset classes, like bonds, for diversification based on your risk tolerance and time horizon.
- Stick to low-cost index funds with expense ratios below 0.20% to maximize long-term returns.
- Use asset allocation based on your goals and risk tolerance. A simple three-fund lazy portfolio of total U.S. stocks, total international stocks, and total bonds can work well for beginners.
- When investing in index funds, take advantage of tax-advantaged accounts like 401(k)s and IRAs as much as possible. This allows you to maximize long-term compounding.
- Once you have a solid core portfolio, you can supplement it with more tactical index funds targeting specific factors, sectors, or strategies. But keep these as satellites around the core.
- Invest consistently over time and maintain a long-term outlook rather than trying to time the market.
Final Words
As a new investor in 2024, you have an incredible number of low-cost index funds to choose from across every asset class and market segment imaginable. This creates a fantastic opportunity to build a well-diversified portfolio right from the start. You can also contact speadinfo.com experts for more investment and financial planning guidelines.
Focus first on those core total stock market and bond funds that instantly give you broad diversification in a single holding. Then, complement them with targeted holdings in other asset classes and factors that suit your goals and risk tolerance.
The index funds highlighted above represent some of the best options for beginner investors to consider across various categories. But they are just a starting point.
