A complete guide to selecting and understanding the best index funds
What are the best index funds for your portfolio? It seems like a simple enough question, but properly answering it requires a deeper dive into the subject matter. While the huge brokerages such as Charles Schwab, Fidelity and Vanguard continue to offer investors more and more options for index funds with lower fees and smaller minimums, it can be difficult to know which index funds might be best. Are they all the same?
If you’re an investor who over-trades and would benefit greatly by just putting money into some broad index funds and forgetting about it, then that answer might be: Yes, for the most part, these index funds are all the same. But if you’re a savvy investor that seeks to build a high quality portfolio with the lowest fees and the right approach to diversification, you might want to look a bit further under the hood of the best index funds available.
So, our team has crafted this guide to help investors properly understand everything you might need to know about index funds and how to build a better long-term portfolio for you and your family.
Table of Contents
- Understanding indexing
- Mutual funds vs. ETFs
- Selection Process
- The best index funds to consider
- Should I not own any individual stocks?
What is an index?
An index is a method for tracking the performance of a group of assets or securities. Indexes can be extremely broad in that they track thousands of assets across a range of types, sizes, and industries, or they can be more narrow and more specialized.
Indexes are useful in several ways. First, the popular indexes such as the S&P 500 and the Dow Jones Industrial Average are often monitored and tracked as a proxy for the entire stock market (and sometimes even the overall economy). You’ll often hear someone say something such as, “The market was up 200 points today.” What they are saying is that the Dow Jones Industrial Average was up 200 points today, but this is often used as an overall descriptor of what the stock market did. The popular US stock market indexes give the media, investors and the financial industry an easy way to describe how the broad stock market is performing.
Moreover, indexes give us a clear way to describe or picture stock market events or performance for a given time period. We can say that “the market roughly got cut in half after the 2008 financial crisis” when referring to the S&P 500 decline in 2008 and 2009. Or, we can say that “tech crashed about 80% after the dot com bust” which refers to the Nasdaq losing about 80% of its value in the 2000-2002 decline.
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Additionally, indexes are used as benchmarks in investing. Investors and portfolio managers will often measure their performance against the benchmark of an index. This can be done generally in the sense that investors often seek to “beat the market” which just means they wish to outperform the S&P 500, typically. Or, it can be used more specifically as well. An example of a specific use is something like a bond fund manager might be comparing his fund’s performance against the Barclays US Aggregate Bond Index. It is common practice for funds to be compared against some sort of benchmark index. Without so, investors can be easily deceived into thinking a fund might be doing very well when in actuality it is underperforming its benchmark.
Lastly, indexes are used in conversations about the global economy. While many Americans might not be overly familiar with specific fundamentals of the Japanese economy, they might be aware of whether or not Japan’s stock market (often referred to as the Nikkei) is up or down on the year. While stock markets don’t track economic health perfectly, they are often used as such in conversations about the global economy.
The goal of index funds
While indexes track various assets and their performance, investors can’t invest in the actual index. The index isn’t an investable security. Instead, investors can invest in an index fund which tracks the particular index. So, if an investor wishes to “own the S&P 500,” he or she can own an S&P 500 index fund.
Interestingly, while the index fund will have components inside it that match the index in which it follows, the index fund does not always replicate the index perfectly. For instance the Dow Jones US Total Stock Market Index claims to have 3753 constituents as of October 30, 2020, however the Schwab Total Stock Market Index Fund (SWTSX) only has 3,186 holdings as of the same date. The fund’s goal according to Schwab is “to track the total return of the entire U.S. stock market, as measured by the Dow Jones U.S. Total Stock Market Index.”
You can read some wiggle room in that description by Schwab. The goal does not say that the fund seeks to replicate the holdings exactly of the index it is following. Instead, it seeks to track the total return of the stock market as measured by such an index. In essence, it’s attempting to match the performance of the index. Yes, it will do that most effectively by having very similar holdings, especially the larger companies in the index, but it won’t perfectly match.
Does it match the performance perfectly? Schwab’s own information will show that it’s extremely close… but not perfect. For instance, the Schwab website shows the 1 year annualized return for SWTSX was +14.71% (as of writing) and the Dow Jones US Total Stock Market Index return for the same period was +14.77%. Very close, but not exact.
This difference is often referred to as tracking error. Tracking error is the measure of the deviation of a fund’s performance away from its benchmark. Since index funds intend to replicate the benchmark’s performance, its tracking error should be very close to zero. While most investors won’t really care about a difference of .06% in a year, it is still good to understand tracking error and how to look for it.
Index funds & fees
Index funds became widely popular for a few reasons. First, history began to show that passive investing by tracking broad stock market indexes has outperformed a majority of hedge funds and advisors that put together portfolios for clients based on stock picking and other methodologies.
Second, index funds have super low fees compared to actively managed funds. Simply put, the fees you pay for owning index funds is next to nothing, and over time, these savings on fees add up. John Bogle, the legendary founder of Vanguard, called high fees that eat away at returns year after year, “the tyranny of compounding costs.”
Lastly, index funds are incredibly accessible to regular investors. They are easy to understand and easy to buy at just about any major brokerage.
Simply put, most investors can do extremely well by just socking away money week after week, month after month into very basic index funds. And most people know this now, so the passive investing game through index funds has become incredible popular and widespread.
Different types of index funds
The universe of index funds has grown immensely in the last decade or so. With so many options, determining the best index funds can be a daunting task. Before we get into actual recommendations later in this guide, let’s go over the different types of index funds you may encounter.
Market weight vs. Equal weight
The vast majority of index funds that you come into contact with are market weighted funds. While the S&P 500 index is made up of the 500 largest US companies, these companies vary greatly in size. For instance, Apple (AAPL) is much, much larger than the 500th biggest company in the index. As such, since the S&P 500 index is market weighted, Apple has a much bigger chunk of the index compared to the smaller companies that are also in the index. In fact, if you’re new to indexes, you might be quite surprised to realize that Apple (AAPL), Amazon (AMZN) and Microsoft (MSFT) combine to make up over 15% of the index, and the remaining 497 companies make up under 85% of the index.
An equal weight index is exactly what the name implies. Instead of the larger companies making up a larger share of the index, they each have the same share of the index. So, if you have 500 companies, each company has 1/500 of the index.
What is better? Well, if you want to stick with the common stock market tracking, you’ll go with the market weighted indexes. Normal S&P 500 indexes are all market weighted. When might you want an equal weight index? Well, an equal weight index fund will de-emphasize the largest companies and place more of an emphasis on smaller companies that are in the index. If you think the largest companies might underperform the general economy, for instance, you might opt for an equal weight index.
Total market vs. Broad market index funds
There are communities of investors that prefer to have exposure to the entire stock market rather than the popular S&P 500 index. While the S&P 500 indeed tracks what we often refer to as “the market,” the reality is that the S&P 500 merely tracks the 500 largest companies in the country. Standard & Poors says that the S&P 500 index covers about 80% of the total market capitalization available in the US. 80% is a lot, but it’s not 100%.
A total market index, alternatively, tracks a larger and more diverse set of companies and should more accurately reflect the US economy. While neither are wrong, let’s briefly discuss total market indexes and some of the confusion that can come with them.
A few examples of total US stock market indexes are the Wilshire 5000 Total Market Index, the Dow Jones US Total Stock Market Index and the CRSP US Total Market Index. Note that all of these indexes are market weighted which is why you can often see a lot of correlation between the total market indexes and something like the S&P 500.
Broad market indexes are also very common, and investors often mistakenly assume broad market means the same as total market. But, broad market indexes often leave off the smallest companies due to lower liquidity of the shares of such companies. For most investors, broad market funds are completely fine. Just know the differences.
Lastly, note that index funds can sometimes change the underlying index or benchmark they track. For instance, the Vanguard Total Stock Market Index Fund tracked the Wilshire 5000 index for years, then in 2005, it switched to the MSCI US Broad Market Index. Then in 2012, it changed again to the CRSP US Total Market Index. Vanguard index funds all track CRSP indexes now.
Bond index funds
Bond index funds are essentially the equivalent of index funds as we’ve been discussing, but specific to fixed income or bonds. Since most of us aren’t going out any buying individual bonds based on our preferences for maturity, credit rating and so forth, bond funds are a great tool to achieve a balanced portfolio. However, while few people poke holes in the idea that equity index funds outperform most active equity funds, bonds are slightly different. Some analysts and advisors make the case that you should consider active bond funds instead of passive bond funds.
Since bonds serve to provide ballast to a balanced portfolio and reduce volatility, the overall return isn’t the primary objective of the bond portion of a portfolio. As such, you might be perfectly fine with bond index funds. If you want to explore further and mix in some active bond funds, that’s perfectly fine. Just look for funds that have a long track record of quality performance and modest to low fees.
Sector specific index funds
Lastly, sector specific index funds are common funds that investors consider as well. For instance, S&P has a number of indexes that track various sectors of the economy. They are things such as Communications, Consumer Staples, Energy, Financials and Technology. And you can find index funds that track these various sector indexes as well.
Should you consider sector specific index funds? To me, this gets into a much different area than what most consider passive index investing. By buying and owning a sector specific index fund, you are essentially making a bet that you believe that sector will outperform the rest of the economy and market. You’re now getting into a form of stock picking (although this approach would be much broader and more diversified compared to picking individual stocks). You’re now believing that you can beat the market. This isn’t the end of the world, but just go into it with eyes wide open. Contrast this with simply owning a total stock market index fund that aims to track the overall performance of the entire market. They are different approaches.
Mutual funds vs. ETFs
A common question when discussing index funds is always whether or not an investor should be buying an index fund via a mutual fund or an ETF. Many brokerages offer comparable index funds in both mutual fund and ETF versions. What’s the difference? What is the better investment for a regular investor?
While the holdings inside a mutual fund and an ETF that track the same index are similar and also share similar performance, the differences are mostly structural in how each fund works. The obvious difference is that an ETF trades like a stock in that you buy shares of the ETF from sellers. “Exchange” is in the name. It’s an exchange traded fund. The mutual fund is different in that you purchase shares from the operator of the fund itself. Of course, this naturally leads to the subject of pricing. How are the shares priced? They are priced differently in each situation.
Because an ETF trades on the open market, its price at any given moment is determined by the buying and selling of shares on the market similar to how a share of Apple stock is priced. If more buyers come into the market, the price will rise. If more people are selling, the price will fall. The Net Asset Value (NAV) of an ETF represents the value of the holdings within the fund. Because the ETF trades on the open market, it’s possible that the NAV and the actual price of the ETF can differ. If the NAV is lower than the price, that would mean that the ETF is trading for a price higher than the value of the ETF’s assets, essentially. Now, the discrepancies between the NAV and price of an ETF are often very minor as buyers and sellers can see the NAV and will know if they are buying something undervalued or overvalued. Moreover, the use of an “authorized participant” and the redemption mechanism help keep the NAV and price quite tight. A detailed explanation of the authorized participant and the role in the ETF is out of scope for this article, but it’s worth knowing that the authorized participant party is able to essentially execute trades and redemption and creation of shares in the ETF to arbitrage out the discrepancies between NAV and price. Their actions help keep the price very close to the NAV of the underlying assets. Confused? Just know that NAV and price of the ETF typically remain very close, though they aren’t always exactly the same.
Mutual funds differ in that the shares do not trade on the open market. So, how is price determined? The mutual fund company itself is required to set the NAV of the fund each day, and the price simply is reset daily as well to the new NAV. This happens at the end of each trading day.
There are a handful of additional mechanical differences between ETFs and mutual funds worth mentioning. Typically ETFs are considered a bit more tax efficient because the number of taxable events inside the fund is lower in an ETF compared to a mutual fund. The manager of a mutual fund is required to re-balance the fund by selling securities in the event that shareholders redeem their shares of the mutual fund. The sale of securities inside the fund creates capital gains potentially for shareholders that are holding the fund even if they did not sell any shares in the fund. Because of how ETFs work, this is less of a concern. Now, with that said, index funds are typically the most tax efficient of funds so the differences in tax efficiency between an ETF index fund and a mutual fund index fund are fairly small. So much so that most investors shouldn’t be overly concerned with it.
Typically ETFs have had a cost advantage for investors. The fees have been lower due to some of the structural advantages that they have. However, in recent years with the renewed battle over fees, you can essentially get a wide range of mutual funds or ETFs for your index fund investing at places like Fidelity, Schwab and Vanguard with negligible fees.
One advantage that mutual funds provide investors is they enable automated investing. By automated investing, I mean you can set up something with your brokerage where you want to contribute $500 every week from a checking account into a mutual fund. Because the shares don’t trade on the open market, the brokerage can make this work. You can’t do this with an ETF since the shares trade on day during trading hours. So, if putting your investments on the maximum degree of autopilot is your goal, then mutual funds might be your better option when choosing index funds.
Selecting the best index funds
Choosing the best index funds to build your portfolio is a fairly straight forward process. We start with the most general questions and get more specific from there. The general question to answer is mainly what your target allocation will be. Then, we’ll look at ways to fill that allocation with specific index funds from specific providers.
Map out your target allocation
What is your target allocation for your portfolio? Do you want to be 100% stocks or a more balanced 70% stocks / 30% bonds split? Or if you’re near or at retirement, you might be even more conservative with a 50/50 split. If you’re a young investor, consider reading our piece on asset allocation strategies for young investors.
An outstanding resource for determining long-term asset allocation is Vanguard’s personal asset allocation model web page. The page lets you know what kind of average returns and volatility you might expect for the various asset allocation models as shown here:
The above graphic is quite useful as a starting point. Once you decide a general target allocation, you can then move on to the next step. For example, if you choose the 70% stocks and 30% bonds allocation, you then need to determine how many funds you want to use within the allocation. The simplest version of this might be what some passive investors call the three-fund portfolio. Using the three-fund portfolio model, you essentially fill the stocks allocation of the portfolio with a domestic equities index fund and an international equities fund. Then you fill the bonds allocation with a bond index fund. While it’s only three funds, you’re obtaining a broad and diverse portfolio that will do very well over time.
Here’s an example of a three fund portfolio:
- 50% Total Stock Market Index Fund
- 20% International Index Fund
- 30% Bond Index Fund
Wanting to get slightly more sophisticated? No problem, but don’t get too fancy. I would suggest limiting your portfolio to no more than 7-8 index funds, and you probably only need 5-6. An example of this kind of portfolio might be something like:
- 25% S&P 500 Index Fund
- 25% Total Stock Market Fund
- 20% International Index Fund
- 15% US Bond Aggregate Index Fund
- 15% Treasuries Index Fund
Once you get an idea of the general breakdown of funds and target allocation, you need to now select the indexes you wish to follow. Let’s move on to that step.
Choose an index
What index do you want to follow? This can be extremely simple, or you can put a large amount of time into it. The fewer the funds you intend to use, you should consider larger and broader indexes. For instance, if you go with the three-fund portfolio, consider the total market indexes for your equities portion. It also makes sense to use widely followed and popular indexes. Avoid some obscure index you find on a random finance blog. Stick to things like the S&P, the Dow Jones, the Nasdaq, etc.
Other considerations in choosing an index will be things like market cap, geography, asset type and more. Need further guidance? Continue reading where we provide a number of specific indexes to consider and the corresponding best index funds for each.
Select a provider
Selecting a provider is the next step when choosing the index funds to invest in. Fees will often be a major determinant for what provider you select, but also consider things such as investment minimums and account minimums. Today, you can get about any major index fund through the big providers such as Fidelity, Schwab and Vanguard.
To help you with this process, our next section details this information for many of the best index funds available.
The best index funds – Large Cap
Most Popular Index: S&P 500
The S&P 500 is both widely monitored as a descriptor of the US stock market, and it’s widely used for index funds. Launched in 1957, the S&P 500 Index represents the 500 largest US companies and represents about 80% of the total value of the US stock market (the remaining 20% coming from the thousands of companies that are smaller than the largest 500 companies). According to S&P, there is over $11 trillion in assets indexed or benchmarked against the S&P 500 index. It is indeed one of the most important indexes in the entire world.
As of Nov. 16, 2020, here is the performance of the S&P 500 index:
- 1 Year: 16.23%
- 3 Year: 11.94% annualized returns
- 5 Year: 12.05% annualized returns
- 10 Year: 11.90% annualized returns
Index Funds that track the S&P 500
|Ticker||Name||Expense Ratio||Minimum Required||Type|
|FXAIX||Fidelity 500 Index Fund||.015%||$0||Mutual Fund|
|SWPPX||Schwab S&P 500 Index Fund||.02%||$0||Mutual Fund|
|VFIAX||Vanguard 500 Index Fund||.04%||$3,000||Mutual Fund|
|VOO||Vanguard S&P 500 ETF||.03%||A single share||ETF|
|SPY||SPDR S&P 500 ETF Trust||.09%||A single share||ETF|
|IVV||iShares Core S&P 500 ETF||.03%||A single share||ETF|
Tech Heavy: Nasdaq 100
Because of the popularity and outsized impact tech has on our economy and investing world today, the Nasdaq 100 has become a very widely followed index. According to Nasdaq, the Nasdaq 100 “includes 100 of the largest domestic and international non-financial companies listed on the Nasdaq Stock Market based on market capitalization.” While most people think “tech” when they hear the word ‘Nasdaq,” as indicated in the description of the index, it’s not only tech companies. However, the Nasdaq 100 is still indeed quite tech heavy. Companies such as Apple, Amazon, Alphabet, Facebook and Microsoft are included in the Nasdaq 100.
Since the Nasdaq 100 is not nearly as broad as the other widely followed indexes such as the S&P 500 or other even more broad indexes, investors should be wary about concentrating too many of their assets into a Nasdaq 100 index fund. Such an index fund can indeed have a place in your portfolio, but it should be relatively small if your goal is to be broadly diversified. Alternatively, you might also consider the Nasdaq Composite Index which is made up of over 3,000 stocks that are listed on the Nasdaq exchange.
As of Nov. 16, 2020, here is the performance of the Nasdaq 100 index:
- 1 Year: 39.40%
- 5 Year: 118.4%
- 10 Year: 426.36%
Index Funds that track the Nasdaq 100
In terms of index funds that track the Nasdaq 100, it’s all about “The Q’s.” The QQQ ETF is one of the most widely traded ETFs that exist. Recently, Invesco launched a second Nasdaq 100 index fund with slightly lower fees and a lower share price.
|Ticker||Name||Expense Ratio||Minimum Required||Type|
|QQQ||Invesco QQQ Trust||.2%||A single share||ETF|
|QQQM||Invesco NASDAQ 100 ETF||.15%||A single share||ETF|
Nasdaq 100 Alternative: Large Cap Growth via the Russell 1000 Growth Index
If you want a tech or growth lean, but want to be more diversified than the Nasdaq 100 index, then the large cap growth index funds should suit you nicely. For this, we’ll choose the Russell 1000 Growth Index. The Russell 1000 Growth Index is a subset of the Russell 1000 Index. The Russell 1000 Index includes roughly 1,000 of the largest companies that make up the Russell 3000 Index. The Russell 1000 represents roughly 92% of the US stock market.
The Russell 1000 Growth Index includes the companies within the Russell 1000 Index that exhibit a higher probability of growth. Typically this is about 600 companies or so. The index is published and maintained by FTSE Russell.
As of Nov. 16, 2020, here is the performance of the Russell 1000 Growth Index:
- 1 Year: 29.12%
- 3 Year: 18.68% annualized returns
- 5 Year: 17.24% annualized returns
- 10 Year: 16.21% annualized returns
Index Funds that track the Russell 1000 Growth Index
|Ticker||Name||Expense Ratio||Minimum Required||Type|
|SWLGX||Schwab US Large Cap Growth Index Fund||.035%||$0||Mutual Fund|
|FSPGX||Fidelity Large Cap Growth Index Fund||.035%||$0||Mutual Fund|
|VIGAX||Vanguard Growth Index Fund*||.05%||$3,000||Mutual Fund|
|SCHG||Schwab US Large Cap Growth ETF||.04%||A single share||ETF|
|VUG||Vanguard Growth ETF*||.04%||A single share||ETF|
*Note that the Vanguard Growth Index Fund (VIGAX) does not track the Russell 1000 Growth Index, but it tracks the CRSP US Large Cap Growth Index instead.
What about “The Dow?”
While the Dow Jones Industrial Average is one of the most followed large cap indexes because of its history and its being cited so frequently as a descriptor of overall market activity, it’s not really an index used for index funds. So, be super familiar with the Dow. Follow it. But it’s not really recommended to try and invest in an index fund that tracks it. An index fund with only 30 positions would be too narrow and not diverse enough.
The best index funds – Total Market
Get it all: Dow Jones US Total Stock Market Index
For those wanting the utmost diversification and broad exposure to track the US stock market, a total market index is the way to go. The Dow Jones US Total Stock Market Index aims to track the performance of the full US stock market. It has over 3700 stocks in its index.
As of Oct. 30 2020, here is the performance of the Dow Jones US Total Stock Market Index:
- 1 Year: 9.99%
- 3 Year: 9.95% annualized returns
- 5 Year: 11.41% annualized returns
- 10 Year: 12.75% annualized returns
Index Funds that track the Dow Jones Total US Stock Market Index
|Ticker||Name||Expense Ratio||Minimum Required||Type|
|SWTSX||Schwab Total Stock Market Index Fund||.03%||$0||Mutual Fund|
|FSKAX||Fidelity Total Market Index Fund||.015%||$0||Mutual Fund|
|VTSAX||Vanguard Total Stock Market Index Fund*||.04%||$3,000||Mutual Fund|
|VTI||Vanguard Total Stock Market ETF*||.03%||A single share||ETF|
*Note that the Vanguard funds listed do not track the Dow Jones Total US Stock Market Index, but it tracks the CRSP US Stock Market Index instead.
Total alternative: Dow Jones US Broad Stock Market Index
As we mentioned previously in this guide, “broad” is not the same as “total,” and the Dow Jones US Broad Stock Market Index is considered a member of the Dow Jones Total Stock Market Indexes family. But there are some differences worth noting.
What are the differences between the broad stock market index and the total stock market index? The broad index has roughly 2500 companies in it compared to the total market index of over 3700. The broad index leaves out many of the microcaps that make their way into the total stock market index. For instance, the smallest market cap company in the broad market index is $40 million while the smallest market cap company in the total stock market index is $2 million.
By and large, the performance is very similar to that of the total stock market index listed above.
Index Funds that track the Dow Jones US Broad Stock Market Index
|Ticker||Name||Expense Ratio||Minimum Required||Type|
|SCHB||Schwab US Broad Market ETF||.03%||$0||ETF|
The best index funds – Small- & Mid-Cap
Do you need small- and mid-cap index funds in your portfolio? I think most investors can get by with just owning broad or total market index funds which include small-caps and mid-caps. However, if you’re so inclined, you can browse the following options:
|Russell Midcap Index||FSMDX||Fidelity Mid Cap Index Fund||.025%||$0|
|CRSP US Mid Cap Index||VIMAX||Vangaurd Mid-Cap Index Fund||.05%||$3,000|
|CRSP US Mid Cap Index||VO||Vanguard Mid-Cap ETF||.04%||1 share|
|Russell Midcap Index||SWMCX||Schwab US Mid-Cap Index Fund||.04%||$0|
|Russell Midcap Index||SCHM||Schwab US Mid-Cap ETF||.04%||1 share|
|Russell 2000 Index||FSSNX||Fidelity Small Cap Index Fund||.026%||$0|
|CRSP US Small Cap Index||VSMAX||Vanguard Small-Cap Index Fund||.05%||$3,000|
|CRSP US Small Cap Index||VB||Vanguard Small-Cap ETF||.05%||1 share|
|Russell 2000 Index||SWSSX||Schwab Small Cap Index Fund||.04%||$0|
|Russell 2000 Index||SCHA||Schwab US Small-Cap ETF||.04%||1 share|
The best index funds – International
Including some international exposure to your portfolio makes sense. How much is a constant debate. A rule of thumb that has existed for a while in investing circles is that 30% of your equities exposure should be international. So, if you have a 70% stocks / 30% bonds portfolio, 30% of the 70% in equities should be in international. This would mean a 70/30 portfolio is essentially 49% domestic equities, 21% international equities, 30% bonds.
With international stocks underperforming domestic stocks for much of the last decade or so, this 30% rule of thumb has come into question. Really, it’s just a matter of preference. Perhaps pick a number between 15% and 30% where you know you’ll sleep well at night, and let it roll.
International index funds are often discussed in two buckets: International (developed countries) and emerging markets. For true diversification, maybe you want to consider both. Emerging markets exposure should probably be lower than the international developed exposure.
Here are some of the common indexes used for international equities:
- MSCI EAFE – An equity index which captures large and mid cap representation across 21 Developed Markets countries excluding the US and Canada. The index has roughly 900 companies in it.
- MSCI ACWI – An index designed to represent performance of the full opportunity set of large- and mid-cap stocks across 23 developed and 26 emerging markets. Note that this includes US and Canada, so this is not really an international index, but more of a “total world” index.
- FTSE Global All Cap ex US Index – The index comprises large, mid and small cap stocks globally excluding the US.
- FTSE Developed ex US Index – The index comprises large and mid cap stocks in developed markets excluding the US.
- MSCI Emerging Markets Index – This index captures large and mid cap companies across 26 emerging market countries.
- FTSE Emerging Markets All Cap China A Inclusion Index – An index comprised of large, mid and small cap companies from emerging markets. The index also includes China A Shares at a weighting equivalent to total R/QFII allocations.
- FTSE Emerging Index – This index provides investors with a comprehensive means of measuring the performance of the most liquid Large and Mid Cap companies in the emerging markets.
Here are some of the best international index funds for your consideration:
|MSCI EAFE||SWISX||Schwab International Index Fund||.06%||$0|
|MSCI ACWI||FTIHX||Fidelity Total International Fund||.06%||$0|
|FTSE Global All Cap ex US Index||VTIAX||Vanguard Total International Stock Index Fund||.11%||$3,000|
|FTSE Global All Cap ex US Index||VXUS||Vanguard Total International Stock ETF||.08%||1 share|
|FTSE Developed ex US Index||SCHF||Schwab International Equity ETF||.06%||1 share|
|MSCI Emerging Markets Index||FPADX||Fidelity Emerging Markets Index Fund||.076%||$0|
|FTSE Emerging Markets All Cap China A Inclusion Index||VEMAX||Vanguard Emerging Markets Stock Index Fund||.14%||$3,000|
|FTSE Emerging Markets All Cap China A Inclusion Index||VWO||Vanguard FTSE Emerging Markets ETF||.10%||1 share|
|FTSE Emerging Index||SCHE||Schwab Emerging Markets Equity ETF||.11%||$0|
The best index funds – Zero Fee
With the introduction of zero fee and zero minimum index funds from Fidelity, it’s worth including as its own section. Here are the four zero fee index funds as provided by Fidelity:
|US Large Cap (Similar to S&P 500)||FNILX||Fidelity ZERO Large Cap Index Fund||0%||$0|
|US Mid and Small Cap||FZIPX||Fidelity ZERO Extended Market Index Fund||0%||$0|
|Total US Stock Market||FZROX||Fidelity ZERO Total Market Index Fund||0%||$0|
|Non US, Developed & Emerging Markets||FZILX||Fidelity ZERO International Index Fund||0%||$0|
Should I not own any individual stocks?
The answer to this question is going to be largely dictated by your personal preferences and risk tolerance, but there’s no reason you can’t still own individual stocks. We would simply advise making the bulk of your portfolio index funds, and have specific rules to guide your stock picking. For instance, in our article on stock picking rules, we mentioned something along the lines of making individual stocks no more than 20% of your overall portfolio and each position being no larger than 2-3% of the overall portfolio. It’s also advisable to set rules for yourself in how often you trade in and out of individual stocks.