Andrew Goldman has been writing for over 20 years and investing for the past 10 years. He currently writes about personal finance and investing for Wealthsimple. Andrew's past work has been published in The New York Times Magazine, Bloomberg Businessweek, New York Magazine and Wired. Television appearances include NBC's Today show as well as Fox News. Andrew holds a Bachelor of Arts (English) from the University of Texas. He and his wife Robin live in Westport, Connecticut with their two boys and a Bedlington terrier. In his spare time, he hosts “The Originals" podcast.
“Index fund” sounds like the term for the sum of money authors have to scrounge together to finish the part of their books that includes page numbers. But index funds actually have absolutely nothing at all to do with publishing. They are in fact vehicles for individuals to invest broadly in stocks or bonds. The “index” part of the term refers to which specific group of securities will be invested in. An index is a hypothetical portfolio of securities whose movement up or down will indicate the performance of a certain segment of a country’s public companies, be they tech, small companies, large companies, or even the whole enchilada of all publicly traded companies. Indexes don’t really exist except on paper–they are created by financial research companies and their names are licensed out for use by companies that market index funds.
Perhaps the most famous examples of an index is also one of the oldest: the Dow Jones Industrial Average dates way back to the late 19th century and is frequently referred to just as “the Dow.” Though it’s now taken as a verbal shorthand for the daily performance of the US stock market, the Dow is in fact a number reflecting the performance of the 30 stocks that are chosen to represent the breadth of the US economy. Other famous indexes include the S&P 500 (the 500 biggest publicly traded companies in the US) and the Russell 3000 (which, yup, includes 3000 companies that together make up about 98% of publicly traded companies in the US.) The FTSE 100—or the “footsie”—represents the biggest 100 companies traded on the London Stock Exchange, and the S&P/TSX Composite Index’s 250 companies listed on the Toronto Stock Exchange are often used as a barometer of the Canadian stock market.Get started with Wealthsimple Trade. Sign up today and start building your portfolio.
The Connection of Low-Cost Index Funds and Passive Investing
Passive investing cannot happen without index funds.
Passive investing is investing broadly in whatever equities make up a certain index. Active investing is either choosing a group of “winner” stocks or relying on the stock picking talents of mutual fund managers to choose a group of winners for you. Passive investing has experienced a relatively recent surge in popularity, a trend that has a lot to do with the fact that most studies show that professionals paid to pick stocks will by and large fail to outperform the overall market over the long term. Since mutual fund managers are expensive to pay, actively managed mutual funds passed on that expense to consumers, and it wasn’t unusual for mutual funds to have management expense ratios of 1%-2%, which can take a huge bite out of investment gains; one Toronto-based investment advisor showed that a small-seeming fee of 2% could decrease investment gains by half over the course of 25 years. So, yikes.
Not surprisingly, given all the recent focus on fees, fund providers have been engaged in a race to the bottom—battling each other with lower and lower MERs for their passive products. So with all those dirt cheap index funds out there, what’s a passive curious girl or boy to buy?
How we selected these 7 low-cost index funds
We’ve compiled a list of 7 solid funds that you might want to consider. Are they the best? That’s a tricky question. There is no such thing as a one-size-fits-all investment strategy, so one person’s “best” investment for providing a lifetime of financial smooth sailing might be another’s Titanic iceberg. If you’re a beginner investor and in the mood to buy some index funds, take a few minutes to check out this article, How To Invest Money Wisely. Spoiler alert: nobody should put all their eggs in any one index fund. To that point, although we’ve included only index funds and ETFs of American stocks, you will certainly want to diversify your portfolio to include bond funds or ETFs, and you may also want to get some exposure into international stocks. We’ll table that particular discussion for another day.
The following index funds we’ve included have four things in common. They’re “no load” funds, meaning you will never pay any kind of sales fee at any point. They’re well established; none are fewer than ten years old. They’re highly-rated; we’re only including index funds with 5 star ratings from Morningstar, a designation the investment research firm awards to only the top 10% of funds in each category with the highest risk-adjusted return. (Morningstar provides their secret ratings sauce here.) And all have very low MERs, none over .18% and most way below that. They’re also all pretty meat and potatoes basic fund, nothing too fancy here that will cause heart palpitations should you share the news of your investment with your accountant—just some good old fashioned low-fee index funds full of all American stocks.
Naturally, if you have already invested with any of the fund providers listed, you may want to research their own offerings in each category since it’s likely that you’d have to pay fees to add another company’s funds to your portfolio—if they’ll allow it at all. There are many financial pros who will insist that one company’s low-fee S&P 500 tracking index fund is just about equal to any other, and we won’t argue too much, especially when there are fees at stake.
|Fidelity® 500 Index||VXAIX||202.6 Bil||0.02%||Large Blend||13.43%||$0||S&P 500® Index|
|Schwab S&P 500 Index||SWPPX||38.4 Bil||0.02%||Large Blend||14.61%||$0||S&P 500® Index|
|Vanguard Growth Index Investor||VIGRX||116.8 Bil||0.05%||Large Growth||15.68%||$3,000||CRSP U.S. Large Growth Index|
|Vanguard Total Stock Market ETF||VTI||72.7 Bil||0.03%||Large Blend||13.36%||N/A||CRSP US Total Market Index|
|Northern Mid Cap Index||NOMIX||2.3 Bil||0.18%||Mid-Cap Blend||14.42%||$2,500||S&P MidCap 400 Index®|
|Vanguard Mid Cap Index||VIMSX||107.0 Bil||0.05%||Mid-Cap Blend||13.50%||$3,000||CRSP U.S. Mid-Cap Index|
|Vanguard Small-Cap ETF||VB||93.9 Bil||0.05%||Small-Cap Blend||12.93%||N/A||CRSP US Small Cap Index|
Automated Investing: the one stop investing strategy
Does the list and article just above leave you wanting to do anything—sock drawer organization! Cover-to-cover 1981 World Book encyclopedia reading!—so you don’t have to spend another second thinking about investing? Does the idea of never having to spend another moment comparing low-cost index funds immediately put you in a better mood? You’re a particularly great candidate for automated investing. See, most automated investing services, or robo advisors as they’re sometimes called, will be able to accommodate investors with any risk tolerance or investment horizon. They’ll assess your financial goals and get you invested in a curated portfolio of low-fee funds perfect for your sitch. The absolute best robos will offer high-interest savings accounts for those who can’t afford to lose a penny of their investment, or, on the other end of the spectrum, growth portfolios filled with stock ETFs that will provide possibilities for high returns for those with the longest investment horizon and highest risk tolerance. The absolute best of the bunch will require no account minimums and provide free unlimited telephone support with investment specialists.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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