Dennis Hammer is a writer and finance nerd with six years of investing experience. He writes about personal finance for Wealthsimple. Dennis also manages his own investment portfolio and has funded several businesses in the past. Dennis holds a Bachelor's degree from the University of Connecticut.
Index funds are powerful investments for investors who prefer to take a passive approach to their portfolio. These kinds of funds track a particular market index (such as the S&P 500 or the Dow Jones Industrial Average). This means that an index fund effectively matches the performance of that index. They also come with built-in diversification, consistent results, and low volatility.
Which index funds are right for you? That depends on your specific needs. Some index focus on growth. Others focus on income. Some strive to keep risk as low as possible. The best index funds for you are the ones that serve your overall investing goals.
The Best Index Funds of 2021
Here’s our list of the best index funds of 2021. Review them carefully. Talk about them with your financial advisor if you have one.Get started with Wealthsimple Trade. Sign up today and start building your portfolio with a free stock.
1. Vanguard Total Stock Market Index Fund (VTSAX)
Market Value: $757 billion
Yield to Date Return: 17.99%
Expense Ratio: 0.04%
This is the largest stock index fund you could buy. It is one of the first index funds that captured the entire U.S. stock market. If you buy this fund, you’ll be about as diversified as you can get among stocks, which drives your risk of catastrophe down. It has tracked with the S&P 500 almost identically since 2016.
This is a cost-effective fund for investors who don’t want to complicate their stock portfolio, but still want the safety of diversification. (It’s still smart to add bonds and international securities to your portfolio).
2. Vanguard Total Bond Market Index (VBMFX)
Market Value: $240.96 billion
Yield to Date Return: 9.25%
Expense Ratio: 0.16%
The Vanguard Total Bond Market Index is the largest bond index fund in the world. It’s a favorite fund for passive investors who want exposure to the entire U.S. bond market. The fund owns thousands of U.S. Treasury Bonds, corporate bonds, and short-term, long-term, and intermediate bonds.
3. Vanguard Growth Index Fund (VIGAX)
Market Value: $91.68 billion
Yield to Date Return: 24.58%
Expense Ratio: 0.18%
This fund invests in large cap U.S. stocks with strong growth potential. It tracks the CRSP US Large Cap Growth Index. It’s riskier than other index funds that are based around the S&P 500, but usually more rewarding. As of August 2019, the fund invests in more than 300 holdings.
One thing we like about this fund is its massive market value, which means investors trust is as a profitable place to park their money. We also like it’s extremely low expense ratio. Less cost means more compounding interest for you.
4. Vanguard Dividend Appreciation ETF (VIG)
Market Value: $46.47 billion
Yield to Date Return: 24.25%
Expense Ratio: 0.08%
This fund tracks the NASDAQ US Dividend Achievers Select Index, which is a group of highly profitable large cap stocks that have shown 10 consecutive years of steady dividend increases. It includes companies like Microsoft, Johnson & Johnson, and Walmart.
We like this fund because of its focus on not just dividends, but dividend growth. It has a history of solid performance (though past performance does not guarantee future results) and low volatility. With a 0.08% expense ratio, this fund is far cheaper than the 0.35% average of similar funds.
5. Vanguard Balanced Index Fund Admiral Shares (VBIAX)
Market Value: $42.37 billion
Yield to Date Return: 14.64%
Expense Ratio: 0.07%
It’s smart to include stocks and bonds in your portfolio in order to create a nice mix of safety and growth. The bonds protect your money from inflation without much risk and the stocks provide growth.
The Vanguard Balanced Index Fund is a way to own a diverse mix of stock and bold holdings. It allocates about 60% of its assets into stock and 40% into bonds. This creates a nice balance of risk and returns for most investors. Long term results have been healthy (around 7%) and consistent. It’s a great fund for new investors, as well, because you only need $3,000 to buy in.
6. Fidelity Extended Market Index Fund (FSMAX)
Market Value: $23 billion
Yield to Date Return: 16.38%
This is a large portfolio of more than 3,000 small- and mid-cap stocks, most of which are American tech, financial, industrial, and healthcare companies. Safer stocks (like consumer staples and utilities) only make up a small portion of this fund, so it’s a good security for investors who want growth, but this also makes it a riskier fund than the S&P 500 or similar mid-cap blends.
Investors have been rewarded for their risk, however. The fund achieved 17.3% over the last ten years, which is about a percent higher than the S&P 500.
What makes FSMAX great is its cost. With expenses of only 0.045%, it’s far cheaper than the average 1.07%. This explains why the portfolio turnover is so low (11%). It does not pay much in dividends, however, so you shouldn’t expect much income from this fund.
7. The Fidelity Total Bond Index (FTBFX)
Market Value: $25.26 billion
Yield to Date Return: 9.66%
Expense Ratio: 0.45%
This fund is similar to the Vanguard Total Bond Market Index, so many investors tend to hold both. It uses the Bloomberg Barclays U.S. Universal Bond Index as a guide to allocate assets across investment-grade, high yield, and emerging market asset classes.
The difference between FTBFX and VBMFX is that this fund focuses more on high yield bonds to capture higher returns. Naturally, this creates a bit more risk and higher expenses.
8. iShares Edge MSCI Min Vol EAFE ETF (EFAV)
Market Value: $10.8 billion
Yield to Date Return: 11.37%
EFAV is a great way to expose your portfolio to low volatility international securities. It looks for well established companies in developed markets in stable economies. Most of its holdings come from Switzerland, the United Kingdom, and Japan and from the financials, industrials, and consumer staples sectors
Admittedly, this fund’s performance isn’t massive, but it’s volatility is lower than most other index funds that track foreign stocks. We also like it because its dividend yield has been slowly climbing and its expenses stay low.
9. WisdomTree U.S. Midcap Dividend Fund (DON)
Market Value: $3.7 billion
Yield to Date Return: 13.83%
This is a great index fund for investors who want the income from dividend-paying, mid-cap companies (moderate risk and decent growth). It holds about 400 real estate, industrial, financial, and consumer discretionary stocks. It receives Morningstar’s five-star rating for its history of consistently delivering above-average returns while also minimizing risk.
We also think this is one of the best index funds because of its low expense ratio (0.38%) compared to the average for mid-cap funds (0.44%).
10. Invesco S&P 500 High Dividend Low Volatility ETF (SPHD)
Market Value: $3.3 billion
Yield to Date Return: 11.83%
Expense Ratio: 0.3%
SPHD is an index fund for investors who want to own stocks for the income, but can’t tolerate much risk. It’s goal is to create consistent returns, even in a down market by tracking the S&P 500® Low Volatility High Dividend Index.
This fund does not invest in high-growth stocks or emerging markets. Instead, it looks at the 75 highest earning stocks on the S&P, with a maximum of ten stocks in a particular sector. From that list, it chooses 51 with the lowest volatility over the last year.
The result is a portfolio with stable, high-paying stocks. The portfolio consists mostly of energy, real estate, and utility companies.
11. Direxion Daily S&P Biotech Bull 3x Shares (LABU)
Market Value: $510.87 million
Yield to Date Return: 7.48%
LABU is a 3x leveraged fund, which means it uses borrowed money to purchase assets. If the fund is managed properly, it should earn more from the rise in value of its assets than the cost of servicing the debt. Basically, it takes your money, borrows three times as much, and then buys securities.
But what does it buy? It buys everything on the S&P Biotechnology Select Industry Index, a group of all of the biotechnology stocks on the S&P 500. It’s goal is to triple the daily returns of the S&P Biotechnology Select Industry Index. When things go well in biotech, this is an extraordinarily profitable index fund.
12. Fidelity ZERO Large Cap Index (FNILX)
Market Value: $227 million
Yield to Date Return: 18.54%
Expense Ratio: 0%
FNILX is one of Fidelity’s experiments with no-cost funds. It doesn’t officially track the S&P 500, although it does track the 500 companies with the largest market caps, so most of the companies in the S&P 500 are tracked by this index. (Fidelity doesn’t use the name “S&P 500” so they can avoid the licensing fee and keep costs low.)
Will this fund perform identically to the S&P 500? No, it tends to leg slightly behind, but the lack of an expense ratio lets investors profit about the same.
Start with Your Investment Goals
Which of the best index funds are right for you? It depends entirely on your investment goals. Do you want safe and consistent? Can you tolerate some risk in exchange for growth? Are you looking for diversification to balance other portions of your portfolio? Don’t just buy whatever’s trendy. Create a strategy and stick to it.Wealthsimple Invest is an automated way to grow your money like the world's most sophisticated investors. Get started and we'll build you a personalized investment portfolio in a matter of minutes.
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