Index funds are still the best building blocks for your portfolio.
At this point, we all know the benefits of using index funds to build-out our portfolios.
Their passive, market-hugging nature provides plenty of diversification benefits. Meanwhile, their ultra-low costs have allowed them to outperform the vast bulk of actively managed investment options over long stretches of time. Matching the market simply allows investors to perform better and have higher returns.
So crafting a core-portfolio of index funds is almost a necessity in this day and age.
But there are plenty of index funds out there. And many track some pretty esoteric and specialized indexes. Not every index fund is made for your core portfolio. In fact, most of them can be just as bad for you as active management. Choosing the right bread-n-butter index fund is critical to using them right. Luckily, here at InvestorPlace, we’ve done much of that leg work for you.
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Here are three bread-n-butter index funds that make ideal selections for your core portfolio.
Bread ‘n’ Butter Index Funds: Vanguard Total World Stock ETF (VT)
Expense Ratio: 0.14%, or $14 per every $10,000 invested
The best index ETFs and funds tend to track large swaths of stocks or bonds — covering entire regions or continents. And you can’t get much larger than theVanguard Total World Stock(NYSEARCA:VT). It basically owns everything.
Seriously, every single stock on the planet.
VT’s index — the FTSE Global All Cap Index— tracks large-, mid- and small-cap stocks located in every developed and emerging market nation on the planet. China? It’s in there. The United States? VT has it. Germany? Plenty of exposure. All in all, the index fund covers roughly 8,000 stocks across 47 different countries. It’s as broad as you can get in an index fund
That broadness makes it an ideal single holding for core stock exposure. Especially for those investors who don’t have a ton of money to allocate towards individual or regional index funds. If you need stocks, buying VT gets them all.
And as a Vanguard fund, VT is dirt cheap to own. Expenses run at just 0.14%, or $14 per $10,000 invested. That helps on the returns front as well. VT has managed to post 5.66% average annual returns over the last five years.
Bread ‘n’ Butter Index Funds: iShares Core S&P 500 ETF (IVV)
Expense Ratio: 0.07%
This index ETF even has “core” right in the name. But the iShares Core S&P 500 ETF (NYSEARCA:IVV) isn’t just using some marketing gimmick, it actually is one of the most solid funds you can use for large-cap stock exposure.
IVV tracks the venerable S&P 500. It’s the main benchmark of large-cap stocks domiciled in the United States. Stocks like Exxon MobilCorporation(NYSE:XOM), Apple Inc. (NASDAQ:AAPL) and Bank of America Corp(NYSE:BAC) dot its holdings. As a main play on domestic equities, the index fund can’t be beat. The real win for the fund comes down to how it is structured.
The classic S&P 500 index ETF — the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) — is structured as a unit investment trust. As such, dividends from the SPY’s underlying holdings must be held as cash until they are distributed to shareholders. As an ETF, IVV is able to immediately reinvest its dividends, use portfolio lending and derivatives. What that means is that IVV’s return has been slightly higher — thanks to no cash drag — than SPY’s. Over time, those little amounts do add up, making IVV a better S&P 500 fund.
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And with expenses being just 0.07%, IVV is already cheaper to start with.
Bread ‘n’ Butter Index Funds: Schwab U.S. Aggregate Bond ETF (SCHZ)
Expense Ratio:0.05%
There’s plenty of reason why investors of almost any age should have some exposure to bonds. Fixed income investments — thanks to their steady coupon payments — can provide a rock from when stocks zig and zag. But with interest rates at rock bottom levels, low expenses are the key to making more in returns.
With an expense ratio of just 0.05%, the Schwab U.S. Aggregate Bond ETF (NYSEARCA:SCHZ) is as cheap as them come.
SCHZ tracks the entire U.S. investment grade bond market. That includes U.S. government debt like treasury bonds as well as corporate IOUs from America’s largest companies. The investment grade part means that these firms have good credit scores and aren’t necessary at risk for default. All in all, the index ETF holds nearly 2,900 different bonds. That diversification does help in case someone would happen to skip a payment.
SCHZ currently has an SEC 30 day yield of 1.76%. That’s slightly higher than some of its rivals and reflects the index funds’ lower expense ratio. It won’t make you rich, but will provide you with slightly more money in your pocket. That’s critical considering just how low interest rates could and will be going forward.
At the end of the day, SCHZ makes an ideal and easy way to add bond exposure to any portfolio.
As of this writing, Aaron Levitt was longis long VT.
Aaron Levitt is an investment journalist living in Ohio. With nearly two decades of experience, his work appears in several high-profile publications in both print and on the web. Also likes a good Reuben sandwich. Follow his picks and pans on Twitter at @AaronLevitt.
