Best Index Funds for a Low-Priced Portfolio

Vanguard Dividend Appreciation ETF

• Type: Large blend
• Assets under management: $65.2 billion
• Dividend yield: 2.0%
• Expenses: 0.06%, or $6 annually for every $10,000 invested

When it comes to the best index funds, the Vanguard Dividend Appreciation ETF (VIG, $153.25) is an excellent choice if you value safety and income growth. The fund tracks the performance of the S&P U.S. Dividend Growers Index, a group of the best dividend stocks that have increased their annual dividend payments for 10 consecutive years.

Only regular quarterly cash dividends are considered for inclusion. Special cash payouts and stock dividends are excluded. To be considered for the index, a stock must have a three-month median daily value traded of $1 million. Existing stocks have a $500,000 minimum. Holdings are capped at a 4% weighting each.

VIG currently holds a little over 300 stocks, with nearly 83% large caps. The rest are primarily mid-cap stocks and a tiny sliver of small caps. The median market cap is $176.9 billion. The average earnings growth rate for stocks in  the Vanguard Dividend Appreciation ETF is 17.9%, with price-to-earnings (P/E) and price-to-book (P/B) ratios of 21.0 and 4.5 times, respectively.

The ETF's top 10 holdings account for 31% of its net assets. Currently, the top three holdings by weight are blue chip stocks Microsoft (MSFT), Apple (AAPL) and Exxon Mobil (XOM), while the largest sector exposure is found in technology (20.5%), financials (18.0%), and healthcare (16.3%). U.S. stocks account for 98.6% of the portfolio.

The Vanguard Dividend Appreciation is also part of the Kiplinger ETF 20, a list of our favorite low-cost exchange-traded funds. Additionally, VIG is available as a mutual fund (VDADX) with a $3,000 minimum investment and an 0.08% expense ratio.

Learn more about VIG at the Vanguard provider site.

ProShares S&P 500 Dividend Aristocrats ETF

• Type: Large value
• Assets under management: $10.7 billion
• Dividend yield: 2.0%
• Expenses: 0.35%

Another one of the best index funds for income investors is the ProShares S&P 500 Dividend Aristocrats ETF (NOBL, $87.67), which, as you can tell by the name, tracks the performance of the S&P 500 Dividend Aristocrats Index. There are currently 67 S&P 500 companies that are Dividend Aristocrats, defined as companies that have increased their annual dividend for at least 25 consecutive years.  

The index contains a minimum of 40 equally weighted stocks, with no sector accounting for more than 30% of the index. It is reconstituted yearly in January and rebalanced four times in January, April, July, and October. 

NOBL invests in all 67 eligible stocks. The weighted average market cap of the index fund is $89.2 billion, with P/E and P/B ratios of 19.3 and 3.5 times, respectively. The top two sectors by weighting are consumer staples (24.7%) and industrials (23.1%), with materials stocks (11.9%) coming in a distant third. The U.S. accounts for 94.0% of the portfolio, with the U.K., Ireland and Switzerland accounting for the rest.

The fund's five-year annualized total return (price + dividends) is 10.5%, slightly less than the S&P 500's 11% total return. However, it is significantly higher than its large-cap value peers. Morningstar gives NOBL a five-star ranking for its performance over the past five years.

Learn more about NOBL at the ProShares provider site.

Vanguard High Dividend Yield ETF

• Type: Large value
• Assets under management: $46.5 billion
• Dividend yield: 3.3%
• Expenses: 0.06%

The Vanguard High Dividend Yield ETF (VYM, $101.36) 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 – a portfolio of 440 stocks ranked by their forecast dividends for the next 12 months and weighted by their market cap. 

The ETF holds 466 stocks vs the 462 found in the index. Top 10 holdings account for 25% of its $46.8 billion in total net assets, with Exxon Mobil, JPMorgan Chase (JPM) and Johnson & Johnson (JNJ) at the top of the list. VYM is also reasonably balanced from a sector perspective, with five double-digit weightings – financials (19.1%), healthcare (13.2%), consumer staples (13.8%), industrials (11.7%) and energy stocks (10.9%).

The typical holding has a median market cap of $128.1 billion, a five-year earnings growth rate of 12.4%, and P/E and P/B ratios of 14.4 and 2.5 times, respectively. The ROE is a healthy 15.5%.

VYM maintains an ultra-low 0.06% expense ratio – a fraction of the average 0.91% expense ratio for the large-cap value category – and the fund further benefits from a low 9% turnover.

The Vanguard High Dividend Yield ETF has earned four stars from Morningstar for the three-year, five-year, and 10-year periods. It is available as a mutual fund (VHYAX) with a $3,000 minimum and a slightly more expensive expense ratio of 0.08%.

Learn more about VYM at the Vanguard provider site.

WisdomTree U.S. MidCap Dividend ETF

• Type: Mid-cap value
• Assets under management: $3.0 billion
• Dividend yield: 3.1%
• Expenses: 0.38%

The WisdomTree U.S. Midcap Dividend Fund (DON, $38.91) is one of the best index funds for investors wanting exposure to mid-cap, dividend-paying stocks. The ETF tracks the performance of the WisdomTree U.S. MidCap Dividend Index.

Unlike market cap-weighted and equal-weighted indexes, the WisdomTree U.S. MidCap Dividend Index is fundamentally weighted, comprising the WisdomTree U.S. Dividend Index, excluding the 300 largest companies.

Each company is weighted annually by taking the most recent quarterly payment, multiplying it by four, and then dividing that amount into the total dividends for all the constituents. As a result, both the index and the ETF have 345 holdings.

Investors often overlook mid-cap stocks because they're considered less stable than large caps and possess fewer growth prospects than small caps. The reality is that they are located in the "sweet spot" between the two.

DON is quite diversified. Its top 10 holdings account for just 9% of its $3.1 billion in net assets. Well-known names in the top 10 include oil and gas stock Chesapeake Energy (CHK), container maker Packaging Corp of America (PKG) and air conditioning distributor Watsco (WSO). From a sector perspective, the three largest weightings are financials (22.7%), industrials (16.8%), and consumer discretionary stocks (11.6%).

While DON is considered a mid-cap fund, it could easily be regarded as a SMID (small and mid-cap stocks) fund because mid caps account for 64% of total holdings, while small caps make up the rest. In addition, approximately 45% of the WisdomTree U.S. Midcap Dividend Fund's holdings are value stocks, 9% are growth stocks, and 46% are a blend. 

Learn more about DON at the WisdomTree provider site.

Schwab US Small-Cap ETF

• Type: Small blend
• Assets under management: $13.3 billion
• Dividend yield: 1.5%
• Expenses: 0.04%

The Schwab US Small-Cap ETF (SCHA, $40.48) tracks the performance of the Dow Jones U.S. Small-Cap Total Stock Market Index, a subset of the Dow Jones U.S. Total Stock Market Index. The small-cap index includes the components ranked 751-2,500 by full market capitalization. As a result, it provides investors with a low-cost way to invest in small-cap stocks.

SCHA was launched in November 2009. It has around 1,750 holdings, with a portfolio turnover of 10%. The P/E and P/B ratios are 12.6 and 1.9 times, respectively. 

The weighted average market cap of the ETF's holdings is $3.9 billion, and approximately 59% of its holdings have a market cap between $3 billion and $15 billion. Another 32% are between $1 billion and $3 billion, with the rest less than $1 billion.

The top three sectors by weighting are industrials (18.3%), financials (16.0%), and healthcare stocks (13.4%). The top 10 holdings account for just 3% of its $13.3 billion in net assets. Included at the top of the list are tech stocks Lattice Semiconductor (LSCC) and Super Micro Computer (SMCI), as well as horse racing company Churchill Downs (CHDN).

The ETF's annualized return since its November 2009 inception is 10.8%, slightly better than the S&P 500's 9.9% annualized return over the same time frame.

Learn more about SCHA at the Charles Schwab provider site.

SPDR Portfolio S&P 1500 Composite Stock Market ETF

• Type: Large blend
• Assets under management: $6.1 billion
• Dividend yield: 1.6%
• Expenses: 0.03%

The SPDR Portfolio S&P 1500 Composite Stock Market ETF (SPTM, $51.27) tracks the performance of the S&P Composite 1500 Index. The S&P Composite 1500 combines the S&P 500, S&P MidCap 400, and S&P SmallCap 600, creating a one-stop shop for almost the entire U.S. stock market. 

SPTM, meanwhile, uses a sampling strategy, which means it doesn't have to buy all of the stocks in the index; it only has to replicate its performance. State Street launched the ETF in October 2000. It currently has 1,524 holdings. The average stock has estimated earnings growth of 11.9% for the next three to five years. It also has an average P/E ratio of 18.5, a P/B ratio of 3.5 and a weighted average market cap of $594.4 billion.

Its top 10 holdings account for around 25% of its $6.1 billion net assets, and include mega-cap stocks like Apple, Microsoft and Amazon.com (AMZN).

In terms of sector weightings, the top three are technology (26.9%), healthcare (13.2%) and financials (12.8%). 

Morningstar seems to agree that SPTM is one of the top index funds out there, giving the ETF a four-star rating over three-, five- and 10-year periods. Its annualized return from inception is 7.1%. 

Learn more about SPTM at the State Street provider site.

Invesco QQQ Trust

• Type: Large growth
• Assets under management: $187.0 billion
• Dividend yield: 0.6%
• Expenses: 0.20%

The Invesco QQQ Trust (QQQ, $347.99) is considered the best index fund for investors seeking exposure to innovative companies in the tech sector and elsewhere. The ETF tracks the performance of the Nasdaq-100 index, a collection of 100 of the largest domestic and international non-financial companies listed on the Nasdaq Composite.

Invesco launched QQQ in March 1999. Since its inception, it has significantly outperformed the S&P 500. As evidence: a $10,000 investment in QQQ in 1999 in QQQ was worth $51,035 as of March 31, 2023, nearly $20,000 more than the index.

According to Lipper, QQQ has been the best-performing large-cap growth fund over the past 15 years. It's also the second most-traded ETF in the U.S. based on average daily volume, and it gets a five-star rating from Morningstar for its 10-year risk-adjusted return.

Because of its innovation focus, there are times when its performance lags, as was the case in 2022. As a result, QQQ's total return was -32.6%, nearly 80% worse than the SPDR S&P 500 ETF Trust. However, in 2020, it generated a total return of 48.6%, almost three times greater than SPY.

Over the long haul, QQQ has proven it can deliver for investors.

Nearly 60% of the fund's holdings are in the tech sector, followed by communication services stocks (19.1%) and healthcare (6.2%). Its top-heavy, too, with its 10 biggest holdings accounting for 59% of its net assets, including Microsoft (13.2%) and Apple (12.2%). Nvidia (NVDA) comes in a distant third at 6.9% of the portfolio. If you don't like many of the names with more significant weightings, QQQ might not be for you.

For everyone else, it's an excellent buy for a core ETF portfolio.  

Learn more about QQQ at the Invesco provider site.

Fidelity ZERO Large Cap Index Fund

• Type: Large blend
• Assets under management: $5.9 billion
• Dividend yield: 1.4%
• Expenses: 0.00%

The Fidelity ZERO Large Cap Index Fund (FNILX, $14.76) is the first of two mutual funds featured here, both of which are from Fidelity. The ZERO in FNILX's name represents the fees you will pay for this large-cap blend: zero.

FNILX got off the ground in September 2018. It was one of two no-fee funds Fidelity launched at that time, adding to the asset management firm's two other funds with zero expense ratios and no minimum investments from August 2018.

Fidelity could afford these no-fee funds because of its scale. To a certain extent, it had moved to a self-indexing approach, bypassing index providers such as MSCI or S&P Dow Jones. At the launch, Barron's described FNILX and its stablemates as "loss leaders," or a way to tempt investors to try out additional Fidelity products.  

As for the meat of the mutual fund, FNILX tracks the performance of the Fidelity U.S. Large Cap Index, a float-adjusted, large-cap-weighted index that represents the largest U.S. companies. The fund's sampling process considers dividend yield, capitalization, industry exposures, P/E and P/B ratios and earnings growth to create a group of holdings replicating the index's performance.

As of April 30, the Fidelity ZERO Large Cap Index Fund had 514 holdings, including portfolio heavyweights Apple (7.1%) and Microsoft (6.4%). The three largest sectors were technology (26.3%), healthcare (14.4%) and financials (13.2%). Its top 10 holdings account for about 27% of its $5.9 billion in net assets.

Learn more about FNILX at the Fidelity provider site.

Fidelity International Index

• Type: Foreign large blend
• Assets under management: $41.9 billion
• Dividend yield: 2.4%
• Expenses: 0.04%

The Fidelity International Index Fund (FSPSX, $44.16) is the only non-U.S. fund covered here. As a result, FSPSX gives investors a low-cost way to gain exposure to international stocks. 

FSPSX tracks the performance of the MSCI EAFE Index which tracks developed markets only. There are no emerging markets countries included. The index has exposure to 16 countries in Europe and the Middle East and another five from the Pacific region.  

This foreign large-cap blend fund has a little over 800 holdings, with the top 10 accounting for about 17% of its $41.9 billion net assets. Familiar names include candy maker Nestle (NSRGY), luxury retailer LVMH Moët Hennessy (LVMUY), and oil major Shell (SHEL). 

The top three countries by weighting are Japan (20.4%), the U.K. (14.6%), and France (12.3%). Europe accounts for two-thirds of the fund's exposure, with Asia-Pacific and Japan making up the rest.

The top three sectors are financials (17.6%), industrials (15.1%), and healthcare (13.0%). Unlike U.S. large-cap funds, you'll notice that FSPSX's tech exposure is modest, at just 7.1% of the portfolio – about one-third the tech weighting in FNILX.

FSPSX is considered a large-cap blend, a mixture of growth and value. Large caps account for 87% of the portfolio, with mid-caps making up the rest. Value holdings are 20% of the fund, growth accounts for 42%, and 38% are a blend of the two.

The fund got its start in November 1997.

Learn more about FSPSX at the Fidelity provider site.