It's common advice that the best place to invest your money is in a low-cost index fund or ETF (exchange-traded fund). There are thousands of funds to choose from each with different holdings and expense rations. The best funds are the ones that are well diversified with a low cost expense ratio– making them the best investment for your money over a long period of time.
A total stock market index fund is an investment that contains a collection of stocks within a mutual fund or exchange traded fund (ETF) that tracks an equity index. An equity index contains numerous stocks across different industries designed to mirror the performance of the overall equity market.
Since investors can't buy an index directly – they can invest in a fund that mirrors an index – such as the Russell 3000 (small-cap), the S&P 500 (large-cap), or the Wilshire 5000 Total Market Index.
Why are index funds and ETFs so widely recommended by long-term investors?
- Great returns. Like all stocks, index funds and ETFs will fluctuate in price. But throughout history indexes have made solid returns. The S&P 500 has gained about 10 percent annually. Index funds and ETFs won't make money every year, but long-term investors can count on a good return on their investment.
- Diversification. Long term-investors choose index funds because they offer immediate diversification. With one investment you can own a wide variety of companies. One single share of an S&P 500 fund provides ownership in hundreds of companies, while a share of a total market fund such as VTI (below) provides investment into thousands of US companies.
- Low risk. Because they’re so well diversified, investing in an index fund is lower risk than owning individual stocks. That doesn’t mean you won't lose money, but the index tends to fluctuate a lot less than an individual stock.
- Low cost. Index funds that track an index tend to charge less (expense ratio) than a managed fund– because there is not as much work in buying and selling assets. Many funds charge and expense ration of just 0.03-0.10 (or $3 to $10 per year for every $10,000). When it comes to index funds, cost is one of the most important factors in your total return.
Let's take a look at 5 of the most widely owned index funds and ETFs and why they make the best investments over the long-term.
Vanguard Total Stock Market ETF (VTI)
The Vanguard Total Stock Market ETF is know as one the the best (if not THE BEST) places to park your money. The fund includes over 4,000 publicly traded US companies and provides exposure to small-, mid-, and large-cap growth and value stocks. It’s also one of the lowest-cost funds (0.03%) for investors to get exposure to the entire US stock market, which is invested almost exclusively in domestic stocks.
VTI is virtually the exchange-traded fund version of the most widely held index fund VTSAX. The main difference is the minimum investment required from an investor standpoint. VTSAX requires a minimum investment of $3,000, while you can begin investing in the VTI for as little as the price of one share (currently $240).
The biggest holdings in VTI are Apple, Inc. (AAPL), Microsoft Corp. (MSFT), Amazon.com (AMZN), Alphabet Inc. (GOOG), Meta (META), formerly Facebook, and Tesla Inc. (TSLA).
Runners up in the total market U.S. funds include Vanguard Total Stock Market Index Admiral Shares (VTSAX), Fidelity Total Market Index Fund (FSKAX), Schwab Total Stock Market Index (SWTSX).
If you want to simplify your portfolio and buy only one investment in your lifetime– VTI is one of the most diversified and lowest cost investments available.
The iShares Russell 3000 ETF (IWV)
The iShares Russell 3000 (IWV) is an exchange-traded fund (ETF) that tracks the performance of the Russell 3000 Index–which measures the investment results of the 3000 top U.S. companies ranked by their market capitalization. IWV has an expense ratio of 0.20% – so more expensive than VTI – but with slightly less exposure to the entire market.
The biggest holdings in IWV are nearly identical to VTI: Apple, Inc. (AAPL), Microsoft Corp. (MSFT), Amazon.com (AMZN), Alphabet Inc. (GOOG), Meta (META), formerly Facebook, and Tesla Inc. (TSLA).
The difference between VTI & IWV is about 1000 small cap stocks. IWV does not include the small cap stocks which can help limit volatility of the smaller companies, but you also loose exposure to the potential growth of these companies–until they get big enough to be included in the index.
If you want exposure to the top 3000 US stocks (and thats a lot of stocks), IWV is a great way to gain a diversified investment.
Vanguard Russell 2000 ETF (VTWO)
The Vanguard Russell 2000 ETF tracks the Russell 2000 Index– 2,000 of the smallest publicly traded companies in the U.S. This Vanguard ETF focuses on a diversified way to have exposure to growth stocks while keeping costs low for investors (0.10%).
The top holdings in VTWO are smaller names you may not be familiar with including: Biohaven Pharmaceutical, Shockwave Medical, Chart Industries, Murphy USA.
If you are looking for more growth potential in your portfolio and you can deal with more volatility than the larger-cap funds, VTWO may be a good place to invest.
Vanguard Total World Stock Index Fund ETF (VT)
If diversification if your thing– it does not get any more diversified than owning a fund that has over 9000 of the world's best companies. The Vanguard Total World Stock ETF VTI tracks the FTSE Global All-Cap Index, which covers practically every stock in the world (except for the tiniest ones).
On an investment of $10,000, (0.07% expense ratio) means you can own nearly every company in world for just $7 a year.
The Vanguard Total World Stock ETF currently hold approx. 60% US stocks and 40% foreign stocks with the most weight on Europe and Asia.
If you are looking for an investment with the most diversification, including non-US companies, VT is the way to go.
And last but certainly not least...
Vanguard S&P 500 ETF (VOO)
The S&P 5oo is one of the most widely held indexes in the world, as it tracks the top 500 US companies by market cap. The Vanguard S&P 500 is one of the largest funds on the market with hundreds of billions in the fund. This ETF began trading in 2010, and it’s backed by Vanguard, one of the powerhouses of the fund industry. It's also one of the lowest cost and least volatile investments available.
At just $3 per $10k invested, you can assume a return of 10% annually on your investment.
There are more funds that track the S&P 500 than any other index– and you cant go wrong with any of them. Depending upon your investment and funds available at your broker other funds to consider are SPY, IVV, SWPPX.
If you had to pick just one investment to own for the rest of your life– many investors would choose an S&P 500 fund.
What are your favorite funds? Let us know 👇