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All Contents © 2019The Kiplinger Washington Editors
By Lisa Springer, Contributing Writer
| March 19, 2019
The recent passing of Vanguard founder John Bogle was a great loss for the investment world. Bogle was responsible for introducing index investing to the fund industry, and in the process, he helped millions of Americans reduce their costs and reach their retirement goals sooner.
Bogle launched the first index fund in 1976 and lived to see his creations grow to a $4.6 trillion industry as of 2018. Capital continues to pour into indexed products, and Moody’s predicts they will grow to represent 50% of the total investment market within five years. This popularity has grown because of index funds’ numerous benefits, which include ...
Here are 11 of the best index funds to buy for a variety of financial goals. This list consists mostly of ETFs but includes a few mutual fund options (including mutual fund versions of ETFs).
Data is as of March 18. Yields represent the trailing 12-month yield, which is a standard measure for equity funds.
Objective: Income growth
Market value: $32.5 billion
Dividend yield: 1.9%
Expenses: 0.08%, or $8 annually on every $10,000 invested
If you value safety and income growth, few indexed investments can match Vanguard Dividend Appreciation ETF (VIG, $109.33). This fund invests in large-cap, highly profitable American stocks that are laser focused on dividend growth. The ETF tracks the NASDAQ US Dividend Achievers Select Index – a group of stocks that boasts at least 10 consecutive years of annual dividend increases.
VIG holds 180 such stocks, which are mostly blue-chip in nature – the largest weights at the moment go to Microsoft (MSFT), Walmart (WMT) and Johnson & Johnson (JNJ). The top 10 holdings make up about a third of the fund’s weight.
Vanguard Dividend Appreciation has been a strong performer over the past half-decade, with its five-, three- and one-year returns all beating the average large-blend fund. Even better, VIG has achieved those returns with less volatility. The fund’s annual standard deviation of returns averaged 11 over three years – lower than both the S&P 500 (11.2) and the average fund in its category (11.6).
VIG’s ultra-low 0.08% expense ratio compares very favorably to an average 0.35% fee for its peers, and low turnover of 14% per year also keeps trading costs from eating heavily into performance.
Vanguard Dividend Appreciation – which has made Kiplinger’s Kip ETF 20 list – also is available as a mutual fund (VDADX) with a $3,000 minimum investment.
Market value: $3.7 billion
Dividend yield: 2.3%
For investors desiring exposure to mid-cap, dividend-paying stocks, WisdomTree U.S. Midcap Dividend Fund (DON, $35.81) is among the better dividend index funds out there. Mid-cap stocks are beloved for their “Goldilocks” positioning between their riskier small-cap brethren and slower-growth large caps.
DON, which holds roughly 400 stocks, is fairly balanced from a sector perspective but is tilted most heavily toward consumer discretionary (19.0%), real estate (15.0%), industrials (13.7%) and financials (10.2%). Top holdings include the likes of midstream energy company Targa Resources (TRGP), beauty company Coty Inc. (COTY) and retailer Kohl’s (KSS).
The fund merits Morningstar’s coveted five-star rating for its ability to consistently deliver above-average returns while keeping risk at average or below-average levels. DON has handily beat the competition over every significant time period, and even bested the S&P 500 in the trailing 10- and one-year periods.
Turnover is on the low side at 27% per year, and DON’s expense ratio of 0.38% compares favorably to the 0.44% average for the mid-cap value category.
Market value: $4.4 billion
Dividend yield: 2.2%
ProShares S&P 500 Dividend Aristocrats ETF (NOBL, $67.20) markets itself as the only ETF tracking the S&P 500 Dividend Aristocrats – an elite group of 57 high-quality dividend stocks that have delivered at least 25 consecutive years of dividend growth.
This fund invests in all 57 stocks, which are equally weighted, so no single stock makes up more than 2% of the fund’s assets at rebalancing. Top holdings at the moment, however, include Roper Technologies (ROP), Air Products and Chemicals (APD) and Dover (DOV). The fund is heaviest in industrials (23.3%) at the moment, as well as consumer staples (22.1%), with double-digit weights in financials (12.3%), materials (10.9%), consumer discretionary (10.5%) and health care (10.2%).
The fund’s five-year returns – its 10.9% annual average is neck-and-neck with the S&P 500 and better than 90% of its large-cap blend peers – and below-average risk have earned it the coveted five-star ranking from Morningstar. Meanwhile, its 0.35% expense ratio is aligned with the category average, and annual turnover is modest at just 22%.
Just note that while Dividend Aristocrats are high-dividend-growth stocks, they’re typically not high-yield stocks. NOBL yields just a little more than the S&P 500’s 1.8%.
Objective: High income
Market value: $17.3 billion
Dividend yield: 3.3%
The Morningstar five-star-rated iShares Select Dividend ETF (DVY, $99.71) is a great index fund for investors seeking higher-than-average yield and a portfolio of stocks that have met stringent criteria for dividend growth and payout coverage.
DVY’s portfolio, which turns over at a light rate of 28% per year, typically consists of 100 stocks. It currently leans toward utility stocks (24.9%), but also has large weights in financials (14.5%) and consumer discretionary stocks (14.2%). The fund’s top 10 holdings are stocked with big American brand name such as Ford (F), AT&T (T) and Marlboro maker Altria (MO), but also includes energy companies like Dominion Energy (D) and even tech companies such as Qualcomm (QCOM) and Seagate (STX). All told, top 10 holdings make up just 18% of the fund, so it’s not too concentrated at the top.
DVY’s 0.39% expenses are a bit more than the 0.35% average expense ratio for the large-cap value category, but the fund has outperformed the category in every meaningful time period. That includes an average 16.2% annual return over the past decade, which beat the S&P 500 – something the fund admittedly has had trouble doing more recently. That said, volatility has consistently averaged 10% to 14% lower than the S&P 500 and other funds in the large-cap value category.
Market value: $23.1 billion
Dividend yield: 3.1%
Vanguard High Dividend Yield ETF (VYM, $86.72) is among the most inexpensive index funds for investors seeking high yields but not high risk. The fund tracks the performance of the FTSE High Dividend Yield Index, which excludes real estate investment trusts (REITs) because they “generally do not benefit from currently favorable tax rates on qualified dividends.”
This is a sprawling portfolio of nearly 400 stocks, most of which are large-cap in nature. Top-10 holdings include the likes of Johnson & Johnson, JPMorgan Chase (JPM) and Exxon Mobil (XOM), and all told account for a little more than a quarter of the fund’s performance. It’s also fairly balanced from a sector perspective, with five double-digit weights – financials (15.3%), health care (13.7%), consumer goods (13.1%), industrials (12.1%) and technology (11.1%).
VYM maintains an ultra-low 0.08% expense ratio – a fraction of the average 0.35 expense ratio for the large-cap value category – and the fund further benefits from a modest 13% turnover. That has helped it outperform most of its peers over every meaningful time frame, though it slightly lags the S&P 500 over those periods. Also nice is that its risk is rated below average compared to the competition.
Vanguard High Dividend Yield ETF has earned four stars from Morningstar and is available as a mutual fund (VHYAX) with a $3,000 minimum and a slightly more expensive expense ratio of 0.08%.
Objective: High income, low volatility
Market value: $2.9 billion
Dividend yield: 4.0%
Invesco S&P 500 High Dividend Low Volatility ETF (SPHD, $42.42) is designed to deliver a hefty yield while holding risk to a minimum. The fund launched in 2012 and tracks the 50 stocks in the S&P 500 that have provided consistently high dividend yields and lower volatility.
The fund is 100% invested in U.S. stocks and most heavily weighted in the real estate (22.1%), utilities (16.0%), energy (14.8%) and financial services (13.3%) sectors. SPHD’s top holdings at present include Philip Morris International (PM), Kimco Realty (KIM), Altria and, funnily enough, its provider, Invesco (IVZ).
SPHD typically is expected to hold up better than the market during volatile and down periods while lagging a bit on the way up. Nonetheless, it has done well in a mostly bull-market environment since inception. It has significantly outperformed its peers and the S&P 500 over the past five- (12.1%) and one-year periods (10.4%), but admittedly trailed both in the trailing three years (8.8%).
Turnover is a bit elevated at 46% annually, but its expense ratio is a reasonable 0.3% (compared to a 0.35% category average). SPHD currently enjoys a four-star rating from Morningstar.
Objective: Low volatility
Assets value: $9.9 billion
Dividend yield: 2.0%
If your goal is simply lower volatility with no preference for yield, Invesco S&P 500 Low Volatility ETF (SPLV, $52.12) is among the index funds you will want to examine. This large-cap blend fund selects 100 stocks from the S&P 500 that have had the lowest volatility over the preceding 12 months. The aim of this fund is to still participate in the upside of stocks, but with fewer big price swings than the S&P 500.
At present SPLV enjoys a four-star overall rating from Morningstar and the fund earned a five-star rating for its excellent five-year performance. SPLV has returned 11.6% over the trailing 12 months, putting it in the top 96% of all large-cap funds and topping the S&P 500’s 10.9% performance in that time.
The fund, which rebalances its assets quarterly, is most heavily invested in utilities (24.9%), followed by real estate (20.1%) and financials (18.5%). Top holdings include Republic Services (RSG), Exelon Corp (EXC) and Ecolab (ECL) – each only just a bit more than 1% of assets because the fund is equally weighted, which means all stocks are reset to equal portions of the portfolio at every rebalancing.
Turnover is high at 68%, but SPLV’s expense ratio of 0.25% still is well below the average expense ratio of 0.35% for the large-cap blend category.
Market value: $24.0 billion
iShares Edge MSCI Minimum Volatility ETF (USMV, $58.22) is a low-volatility product designed to track the performance of large- and mid-cap U.S. stocks that are less volatile than the overall stock market. This large-cap blend fund has earned four stars from Morningstar for its ability to deliver average or above-average returns at lower risk.
This fund differs from SPLV in that it grabs its stocks from a much wider set of stocks within the U.S., not just the S&P 500. USMV has outperformed the S&P 500 over the trailing five- and one-year periods, and it’s been ranked the top large-blend fund in both periods – perhaps unfair given that it has mid-cap exposure that can help its growth profile.
The fund currently holds 213 stocks with a nice blend that includes 8%-plus weights in eight different sectors; information technology (16.3%), health care (14.8%) and financials (12.6%) are top dogs. Top individual holdings at the moment include Visa (V), Waste Management (WM) and Newmont Mining (NEM), and no stock makes up more than 1.7% of the portfolio at present.
Expenses are low at 0.15% versus the 0.35% category average, and 22% annual turnover is low, too.
Objective: International exposure, low volatility
Market value: $10.8 billion
Dividend yield: 3.2%
Don’t let its overlong name discourage you. The IShares Edge MSCI Min Vol EAFE ETF (EFAV, $72.23) is a great core holding for investors looking for low volatility in their international allocation. EFAV invests in “developed” markets – more well-established, stable economies – outside the U.S. and Canada. It targets stocks that have lower volatility than the MSCI EAFE index of international stocks.
This iShares ETF holds about 290 securities, with top geographical weights led by Japan (28.5%), Switzerland (13.9%) and the United Kingdom (12.2%). From a sector perspective, the ETF is heaviest in financials (16.6%), consumer staples (16.2%) and industrials (13.0%). Top holdings are who’s who of international blue chips, including the likes of Hong Kong and China Gas (HOKCY), Nestle (NSRGY) and Novartis (NVS).
EFAV’s performance has been mixed, topping its benchmark in the five- and one-year periods, but coming up more than two percentage points short in the three-year. That said, volatility of returns averaged roughly 20% less than its benchmark index and other funds in the foreign blend category.
This ETF increased its distribution by 24% last year, but payment growth has been erratic over the past five years. This is typical of funds that own foreign stocks because non-U.S. companies’ dividends often are determined based on a percentage of earnings year to year.
Low expenses of 0.2% are competitive with other funds in the foreign blend category, which averages 0.35%.
Objective: Income, international exposure
Dividend yield: 5.4%
iShares International Select Dividend ETF (IDV, $32.17) is one of a few index funds aimed at investors who want not just international diversification, but high income. The fund is benchmarked to the Dow Jones EPAC Select Dividend Index – which has certain requirements for inclusion that focus on dividend growth and payout coverage – and is considered a foreign large-cap value fund.
It certainly achieves high income – its 5.4% yield is about as good as it gets for a straightforward equity fund. That said, distribution growth is unsteady just like EFAV because of the nature of international dividends.
IDV’s 100 holdings are distributed across a bundle of countries including the U.K. (24% of assets), Australia (15%) and France (8.4%). Financials are the biggest sector weight by a mile at 37.8%, reflected by top-10 holdings such as Commonwealth Bank of Australia (CMWAY), Sweden’s Nordea Bank (NRDBY) and Italy’s Azimut Holding (AZIHY). The ETF also features double-digit holdings in communication stocks (11.8%), utilities (10.4%) and consumer discretionary stocks (10.3%).
The fund’s 0.50% expense ratio is slightly higher than the 0.48% average expense ratio for industry peers, but the fund has turned in an exceptional long-term performance. Over the past decade, IDV has returned 11.6% annually, easily beating out the 9.4% annual return by the benchmark, and better than 96% of all foreign large-cap value funds.
IDV earns praise from Morningstar for its ability to deliver average or above- average returns over extended periods while keeping risk at average levels.
Market value: $23.0 billion
Dividend yield: 1.4%
Fidelity Extended Market Index Fund (FSMAX, $62.16) is a good pick for growth-oriented investors. This fund is designed to capture the total return performance of American mid- and small-cap stocks, and it’s a low-cost option at that.
FSMAX has a monstrous portfolio of 3,141 stocks, the vast majority of which (99.99%) are domiciled in the U.S. That said, there are tiny allocations to international companies.
Tech stocks are unsurprisingly the largest sector holding at 18.3% of the fund, followed by financials (16.5%), industrials (13.4%) and health care (12.3%). Typically low-growth utilities and consumer staples stocks combine to make up less than 6% of the portfolio. Top holdings are extremely technology-focused in nature – Tesla (TSLA), ServiceNow (NOW), Square (SQ) and Workday (WDAY) are among FSMAX’s 10 biggest weights.
The fund is considered higher-risk than either the S&P 500 or the typical mid-cap blend fund due to a standard deviation of returns averaging more than 1 point higher than other category funds and more than 3 points higher than the S&P 500. However, long-term investors have been well-compensated for their risk. FSMAX’s 17.3% average annual returns over the past 10 years outstrip both the S&P 500 (16.5%) and the mid-cap blend category average (15.3%).
The Morningstar four-star fund charges a dirt-cheap 0.045% that’s far, far below the average category fee of 1.07%. Portfolio turnover also is low at just 11%.
FSMAX pays distributions semi-annually and increased payments 11% last year. However, income is not a primary focus for this fund, as evidenced by its 1.4% dividend yield.